Sunday, May 24, 2009

Have Ireland's Banks Gone on Strike?

I've been talking to a lot of small and medium sized business owners and directors lately at various conferences. The story is virtually the same whomever I talk to: business is tough, but getting finance is even tougher. It's as if Ireland's banks have gone on strike: they might be 'open for business', but the answer is still 'no'. Or worse: a 'slow no'.

Many businesses are managing to trade profitably - or at least to breakeven - by cutting costs to levels appropriate to reduced turnovers. But cash flow is killing them: debtors who used to pay in 50-60 days (it's not done in Ireland to abide by 30 day credit terms) are now paying in 120-150 days, if at all. The result, of course, is that businesses have to stretch out their payments to creditors - resulting in a vicious cycle of delayed payments that threatens the viability of many businesses. Inevitably many are then forced to seek support from their banks in the form of increased overdrafts or invoice discounting and similar measures.

And there's the problem: the banks have their own issues and frankly aren't that interested in lending to businesses - especially SMEs. Unfortunately it is extremely difficult to get detailed information about bank lending to businesses. The preliminary results published last week by Bank of Ireland repeatedly combines SME and corporate lending as one category. Except on page 51 of the accompanying presentation which informs us that business loan volumes were up 1% in March 2009 on the previous year; corporate loans were up 10%.

The latest Central Bank data on sectoral developments in private sector credit does not shed any more light unfortunately. Though it does inform us (via Table 1) that the largest and fastest growing sector for bank lending is ... to other banks. Or 'financial intermediation' as the Central Bank calls it. Real estate and mortgages are the other sectors experiencing year-on-year growth (though wasn't that what got us into some difficulty before?). Only the smallest scraps are left for non-construction related businesses. The bulk of them SMEs.

But fear not, the Government is on the case and has responded in its usual efficient way by setting up a committee. Or the Credit Supply Clearing Group to give it its full title. Reading the remit of the new group it is clear that they will be a talking shop and not much else unfortunately. For example, there is no commitment to publish better or more up-to-date data about the true status of bank lending to businesses in Ireland. I have a simple suggestion to make to the new Group: have every bank receiving taxpayer money to bail them out from their past mistakes publish information every month about the number and value of loans to SME customers. Plus their average terms (timing of repayments) and interest rates. The Central Bank should co-ordinate the data gathering (as it does for its own statistical purposes). Better still: publish the data on a bank by bank basis - it will then be clear to Ireland's SMEs which banks are truly 'open for business'.

We may need to go further. Jim Stewart, writing on the Tasc blog, proposes setting up a new bank specifically to provide finance to Irish businesses. I agree with his view that business lending is a vital and pressing issue right now. I disagree, however, with his view that meeting the banking needs of SMEs is best addressed by a not-for-profit organisation on account of the likely losses incurred by lenders to businesses. As I noted above, the issue facing many businesses is not losses so much as cash flow. Business banking has been, is and will continue to be an extremely lucrative source of profits for Irish banks and for any other providers entering the market.

By providing information on the volume and value of lending to SMEs it will be clear to existing and new banks just how much money is to be made from business banking by those with the resources to lend. And a resultant surge of new lending to viable businesses will be one sure way to get us back on the path to wealth and job creation.

Postscript: I've just come across an article in this week's Economist making much the same point - SMEs are vital to growth and job creation but universally stymied by banks trying to sort out their own problems and those of their largest corporate customers.


  1. Hi Gerard, new to your blog. It's very informative.

    How would publishing the volume and value of SME loans inform other banks how profitable it is ? Surely you'd need a lot more detailed info - term, rate, security, sector etc.


  2. I have been interested in SME finance since 1972. In good times and bad, there has never been a shortage of complaints about the difficulties in obtaing credit from "the banks". It's like the dawn chorus or the farming community talking about cattle prices :-)


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