SMEs bemoan lack of lending competition

ISME cites "unhealthy concentration" of lenders as reason for high interest rates

The latest figures from the Central Bank show strong lending growth to small and medium-sized businesses last summer, though ISME is concerned that the small concentration of lenders is costing firms.

Lending to the SME sector rose by 5% for the three-month period from July to September last year compared to the same period in 2015.

Although this came immediately after the shock Brexit vote in June, it is likely that many of these loan applications were already being processed before the referendum, meaning data for the next quarter should provide a better indicator of the willingness of SMEs to borrow after assessing the impact of Brexit.

Lending growth was highest in the manufacturing (37%), hospitality (25%) and construction (14%) sectors, owing in part to the strong recovery seen recently in building and hotels and restaurant activity.

Meanwhile, lending volumes fell in the wholesale, retail and services sectors.

Although the average interest rate here has decreased from 5.9% to 5.5%, the cost of credit remains significantly higher than the EU average.

The performance of loans is improving, with 24% of outstanding SME loan balances in default, down from 41% two years earlier.

However, the rejection rate rose to 16%, up from 11% in the previous report.

Interest rates are higher for smaller loans. The average rate in the latest six months of data, for April to September, is 5.5%. This is 3.2 percentage points lower for loans between €250,000 and €1m.

ISME maintains that the figures show what it calls “an unhealthy concentration” of SME lending in the hands of three banks – Bank of Ireland, AIB and Permanent TSB. This trio generated more than 90% of all gross lending to the sector. Former Central Bank Governor Patrick Honohan argued before his retirement over a year ago that, while interest rates had  fallen across Europe, Ireland was the exception.

Rachel McGovern, chief operations officer for financial brokers group PIBA, told the Irish Independent:

"This is not good for a country well on the road to recovery.

 

"More needs to be done to support Irish SMEs grow, and the State needs an urgent analysis of what is keeping competitive forces out of the Irish lending market."