Reproduced from The Independent
By Richard Curran
4th December 2014
Headlines generated by bank announcements about lending to SMEs would almost leave you thinking that everything was back to normal. The main banks are lending more money now to SMEs than they were, but there is still very little sign that they are back in the business of taking any kind of risk.
Whether its statements about lending to “SMEs and farmers” or AIB saying that lending approval to SMEs is up 60pc, there are still real difficulties for many people getting the right kind of backing.
The main banks are definitely focusing on particular sectors when it comes to concentrating their lending. It would be wrong to say that they will not give an SME a loan simply because it is in a particular sector – although that might have been true about three years ago.
Instead they see particular sectors as fertile ground for doing a lot – but not all – of their solid, low risk, high return, profitable lending. In AIB’s case it approved loans of €5bn to SMEs in the first 10 months of this year, supported by what it called its “sectoral-led strategy”. That doesn’t mean all €5bn was drawn down or even will be drawn down.
In Bank of Ireland’s case, SMEs actually drew down over €1bn less than was approved. This reflects a stunted appetite for borrowing and risk on the borrowers’ side. However, it also shows that much of the loan approval going on is for companies that don’t actually need the money.
When it comes to those who really do need the money, the SME lending sector remains quite dysfunctional.
I know of one retailer who tried to borrow €20,000 from his bank. He was turned down. The same day one of his three staff came up to him having secured a €15,000 bank loan to buy a car.
Surely, the ability of the employee to pay back the car loan is dependent on the retailer being able to stay in business and repay his debts. Different risk appetites applied for different types of lending.
The Government should have a big part to play in using the resources of the State to fill this gap. It has tried a few things but it is hamstrung and its efforts have only been half-hearted.
Firstly, it owns all of AIB and up to recently it owned a very sizeable chunk of Bank of Ireland (now 15pc). Its focus has been on getting these banks back to profitability quickly, to enhance their value and get a return for tax payers on their bank bailout.
It has not wanted to see the banks engage in risky lending and neither has it wanted to set up a state banking operation that would compete with them.
The result has been a number of bits and pieces. Finance Minister Michael Noonan has secured around €150m in cheap funding from the German state-owned bank KfW, which is to be made available through the main Irish banks as a source of cheap SME loans. However, the State has underwritten or guaranteed this €150m. This means, if the loans are paid back, KfW could make a modest profit on the interest from supplying the money. The banks should make a small amount too for administering it.
If the loans are not paid back, the State will pick up the tab. Surely, if the State has to foot the bill for losses, then it should get the gain if the loans go well. What is the point in having this money from Germany in the first place if it is zero risk for the Germans?
The National Pension Reserve Fund has €7.1bn it could make available for this purpose. Apparently, it will make some funds available through the new Strategic Banking Corporation of Ireland. This group is also getting between €200m and €400m from the European Investment Bank, yet again with an Irish State guarantee. Once again, taxpayers will take any pain but get none of the gain.
Of the €7.1bn tied up in the National Pension Reserve Fund, €3.9bn of it is held in cash and bonds, which right now are making virtually nothing. The cash element is €2.4bn, a chunk of which is being used to bolster deposits for banks like Permanent TSB, with negligible return.
If the NPRF had stuck €400m of this into Dow Jones Index and the Nasdaq, the fund would be up €82m so far this year. If it stuck €20m into Apple Inc, it would be up €8.6m. The gains alone from these investments would have amounted to almost two thirds of what KfW is making available for SMEs.
For the ordinary guy running a shop, strategic investment funds mean nothing. He may need €15,000 or €25,000 to get through the crisis. That is where the Government’s Microfinance Ireland initiative comes in. Set up in 2012, it awards loans of up to €25,000 to start-ups and SMEs that have been turned down by a bank for a loan. The head of Microfinance Ireland described this situation last week as “nonsensical”. And he is right. Why put owner managers through a process with a bank, that they know will fail, just to qualify for a small loan.
The legislation around Micro-finance Ireland needs to be changed, allowing it to give out more money and not just to those who have been turned down by the bank.
Demand for Microfinance loans is inreasing from six applications per week last year to ten now. The organisation has received 729 applications and approved 57pc of them – an extraordinary figure given they had all been turned down by banks.
Interestingly, the biggest single group it has lent money to are retailers and mechanics. The next biggest is manufacturing companies.
It is an indictment of the banking sector that people like this are not being backed for such small amounts. Look at the sheer stupidity of some of the multi-million euro property loans doled out during the boom.
These tiny loans can make a big difference to a small business in a small town. The Government should release some of the shackles on its SME funding initiatives or force the banks to do it instead.