AIB, BoI tell Elderfield to back off over SME penalty interest
Eurostat survey shows Irish banks are second worst in the EU for providing credit to small firms
Published 04/10/2011 | 05:00
AIB AND Bank of Ireland have made it clear they will continue charging thousands of small businesses penalty interest and account surcharges despite plans by the financial regulator Matthew Elderfield to curb the practice.
The two banks have made strongly worded submissions to Mr Elderfield on the issue, with Bank of Ireland claiming the regulator is trying to override contract law.
AIB has warned that if it is stopped from applying such charges, it will simply have to ask the entire SME market to absorb them. The bank said that without the charges customers could engage in "inappropriate behaviour''.
Mr Elderfield is proposing changing the code between the banks and SMEs in relation to lending and arrears.
The clashes came as a new survey by Eurostat showed that Ireland ranks second worst in the European Union in terms of providing bank credit to small and medium-sized companies.
The percentage of unsuccessful applications for bank credit by smaller companies rose to 27pc in 2010 from 1pc three years earlier. The proportion of successful applications fell from 97pc to 53pc during the same period, while partially successful applications rose to 20pc last year. Ireland is second only to occurred in Bulgaria, according to the statement.
Banks claim their current arrears systems are working and they operate on a case-by-case basis. Bank of Ireland has told Mr Elderfield bluntly that there is no requirement for any changes.
''The existing SME code has been more than adequate to regulate the market in the current economic climate,'' writes Mark Cunningham, director of business banking.
AIB makes it clear to Mr Elderfield that fees and penalty interest are charged because of extra costs banks have to absorb when accounts go overdrawn.
''Lenders incur costs in managing unscheduled or unauthorised borrowing such as operational, staff and funding costs,'' writes the bank's regulatory officer James Meagher.
"If lenders are prohibited from imposing surcharge/ penalty interest and referral fees etc, costs incurred by the lender will have to be borne by the entire SME customer base,'' he says.
"This could have the effect of increasing the cost of borrowing for all SME customers,'' he warns.
Bank of Ireland makes a range of claims that Elderfield's reforms are an attempt to override routine contracts between lender and borrower.
''The existing SME code acknowledged the lenders' legal rights in accordance with the underlying legal contracts. This clause appears to have been deleted from the proposed SME code,'' Bank of Ireland points out.
"The lender has a fundamental right to debt recovery.
The Department of Finance meanwhile, has asked Mr Elderfield to make a number of changes to the wording of the reformed code he is proposing.
The department said it operated on an arm's-length basis from the banks, and it said Mr Elderfield should not insist in the code that they have specific SME units or training to deal with arrears.