The government has announced lending plans to SMEs from Bank of Ireland and AIB. It has also released the quarterly report of its Credit Reviewer, John Trethowen. Mr. Trethowen has concluded that he has “found no evidence of bank lending policies which constrained the supply of credit to viable businesses in either of the banks.” If this is correct, then the two banks have formulated plans to deal with a problem that apparently does not exist.
In judging these plans, it would be nice if we were provided with information that distinguished stocks and flows. Of the two plans, AIB’s strikes me as slightly more useful in stating that it has “total lending of over €13bn to SMEs at year-end 2009”. This puts the commitment to €3 billion per year in 2010 and 2011 in “new or additional credit” in some context. One would like to believe that this is a commitment to have total SME lending from the bank at €16 billion by the end of the year but I’m guessing this doesn’t have to be the case: Expiry of old loan agreements could, for all we know, match the €3 billion in new and additional credit.
What would be really useful here would be comprehensive statistics on SME lending in Ireland. It is my understanding the Central Bank are preparing to publish such statistics. Hopefully, these will be more useful in assessing the situation than the assurances of the banks or, with respect, Mr. Trethowen.
19 replies on “SME Lending Announcements”
If you take the rough rule of thumb that the duration of a banks loan book is about 3-5 years then you might expect 4bn of SME loans to roll off over the life time of this programme. Therefore AIB could easily extend 3bn, let the stock shrink by 4bn & still meet its goal.
In the last cycle the govt healvily incentivised bank lending to property. That did not end well. Now we install a credit Czar to implement a 5 year lending plan with specific sectoral targets. It reminds one of the old Soviet Union. Or maybe this is all just for show in which case the outcome might not be so bad.
“If you take the rough rule of thumb that the duration of a banks loan book is about 3-5 years then you might expect 4bn of SME loans to roll off over the life time of this programme. Therefore AIB could easily extend 3bn, let the stock shrink by 4bn & still meet its goal.”
Bingo. The banks extended 3bn to business in 2009, yet the demand exceeds supply of credit according to ISME (not that they are an incredibly credible source!).
I think it is all for show. It is at best avoiding a drought by rationing. Extending the limited supply of credit in higher proportion to business will have to come at the expense of credit anywhere. Residential property, anyone?
I also am intrigued as to what constitutes business lending. We see from Anglo and indeed the big two that there was a lot more concentrated lending to individuals in the property business than their C&D books implied. Does a loan to a construction business for general business use constitute business lending or C&D lending?
and we were told that lending wouldn’t become political with either a nationalised or part state owned bank!
This is political.
Separately, there are ways in which banks can fudge the figures
1. turning overdrafts into term loans
2. rolling over loans to improve cashflow -(for example) taking a 3yr loan in yr 2 and to help the firms cash flow turn it into a 5yr loan.
3. concentrate credit on firms already viable, if a company that looks good asks for 30k offer 50k and favourable terms with no penalty for prepayment – this will flush credit toward the companies that are going to survive anyway.
Frankly, forcing credit doesn’t sound like a good idea, to me, setting a target is arbitrary, what happens if they don’t do it? and worse, what if they do, or even beat the figure – will they be doing a societal good or manipulating their promise using one of the methods outlined above?
A far better solution might be to only allow deposit taking in this jurisdiction if you do a certain amount of lending, currently that distortion is ensuring that money that is going to be lent is doing so, but not in Ireland. This isn’t a call for protectionism, just seeking intermediation from the banking sector rather than a one sided version of it.
The Fed ran a major conference on small business lending yesterday, following a series of 40 regional consultations with SMEs, banks, examiners etc. Agenda here http://www.federalreserve.gov/events/conferences/2010/sbc/agenda.htm and speeches by Bernanke and Governor Duke here http://www.federalreserve.gov/newsevents/speech/bernanke20100712a.htm and here http://www.federalreserve.gov/newsevents/speech/duke20100712a.htm. Other papers not yet online.
It’s just another lie from the DOF.
All about creating confidence and the belief that something tangible is being done, same goes for the innovation fund and the fanfare around every 30 new jobs announced!!
The “goverment” saves the day! …or should I say banksters?
How is more debt going to help?
If one third of loans to SMEs are non-performing does it make macro-prudential sense to force additional lending to SMEs?
And how is an economy to exit a credit splurge except by some reductions in credit i.e. delveraging?
Does the sainted Patrick Honohan – guardian of our financial stability – have nothing to say about all this? Or do his comments only apply in retrospect and never in real time?
“and we were told that lending wouldn’t become political with either a nationalised or part state owned bank! ”
Acually, i think i recall that at one stage a major argument against postwritingdown nationalisation of the banks was that such a beast would ineviably result in politicalisation of lending. Im abroad at present so cant easily access everything but there are several cases where this was put forward.
So now we are here with politically directed lending (despite there being no apparent problem)
A huge issue here is the terms on which credit is being extended.
Many viable businesses are getting credit but at extortionate rates that is causing them to lay people off and making then strugle to pay creditors. This is having a huge negaitve effect on the economy.
Banks have ramped up their margins hugely. This is partly due to cost of funds to the banks. Of course, the cost of funds are high because the banks lent recklessly.
There is a feeling amongst business people that it is also due to the banks deciding to screw their customers to the Nth degree in order to shore up their balance sheets. Customers feel the banks know they can get away with it because there is no competition. There is fury from small businesses at what they percieve as vile opportunism and hugely arrogant lack of solidarity with the tax-payers and economy that is providing their life-support.
Statements as to the amounts being lent out will not disclose these problems.
@Brian Lucey: that’s the point though, once the state have a hand in it credit becomes political, I can’t help but think they should have all been allowed to face the same fate other private entities face, bite the bullet and get sold to the highest bidder.
Anther issue here is the extend to which viable operations are being made insolvent by property activities.
For instance, If a company is running a business, e.g. Shop, that is making profits of €60K a year but the company is loaded down with property loans it canot service to the company or to its shareholders then the bank is reluctant to extend credit to them. In normal times, one might sell the business or the properties but the truth is the market is becalmed (fire-sales or not). The end result is that a viable “business” if not a “viable company” is sent to the wall and jobs are lost.
Irish Independent – “SME property addiction hampers bank lending”
I don’t understand how there is not an issue.
If two of the six cases dealt with were overturned by the CRO, does that not imply a rather significant problem?
The more interesting question, to me, is why there have been so few appeals in the first place…
@ Karl Whelan
Hopefully you’re right & we will get some colour on the breakdown between net new lending & old loans being paid down.
I’ve gone through 30 years worth of PSC figures and made some (possibly tenuous) assumptions about Residential Mortgages e.g. 20 to 25-year repayment loans taken out in the 1980s & 1990s, making further assumptions about the number of new mortgages each year (as a % of total housing stock as well as new build), then calculating what proportion of the monthly repayment is now Principal vs Interest (90% in case of loan in last few years of it’s life), and I estimate that between EUR 200 to Eur 300 million per calendar month is presently being repaid by these older loans.
The latest CB figures show PSC fell EUR 1.7 Bn in May including a EUR 353 million drop in Total Outstanding Resi mortgages (incl Securitisation) down to EUR 145.8 Bn. Even allowing for these existing loan redemptions, it appears that new lending is negative too!
Obviously this only focuses on property lending & excludes term loans, credit cards, business overdrafts etc. It is nigh on impossible to get a handle on what the level of capital repayment is being made on the EUR 80 billion of mortgages that were taken out between 2004-2007, but it is probably of the order of another EUR 150 million per month (based on 80bn @ 3.5% @ year-5 in 30yr repayment mortgage). Another EUR 35 bn of resi mortgages were taken out between 2000-2004, so that would equate to a further 75 million a month in Principal repayments.
All told, Irish lenders could be reciving up to half a billion euros in capital repayments & redemptions on older homeloans. Therefore the net new lending to FTBs etc. would only be about EUR 150 million per month.
This would tie-in with IBF FTB data on Q1 2010 of EUR 469 million. (Incidentally for 2,300 buyers, so < 10,000 p.a. and many of these buy 2nd hand properties).
Net lending figures would be a great help.
Mr. Trethowen has concluded that he has “found no evidence of bank lending policies which constrained the supply of credit to viable businesses in either of the banks.”
PWC, the DoF, the NTMA and all the banks in Ireland couldn’t give a true picture of their loan book over the last 1.75 years. How can we have any confidence that we are being given a tru picture of credit availability, particularly when it goes against all anecdotal evidence.
Mr. Trethowen “found no evidence”? Did he find anything at all?
The validity of your broader point notwithstanding, how does the anecdotal evidence to which you refer, such as that produced by ISME, tally with the remarkably low level of appeals?