Spotlight falls on SME loans as regulators probe arrears
Published 02/12/2010 | 05:00
A recent rise in arrears on small business (SME) loans and a lack of security underpinning many of the loans is to be probed more closely by regulators acting on behalf of the IMF/EU team.
The Government, the Financial Regulator, the IMF and the EU have all promised the banks €10bn in fresh capital, with more potentially following. But the use of the capital has not been disclosed and will only emerge after a fresh stress test.
The Irish Independent has learnt that in some banks, impairments and close monitoring is being done on more than 45pc of SME loans.
The Irish banks have also started asking for personal guarantees in a large number of cases in order to extend a loan to small business customers. Cash deposits are also being put up as security.
The IMF/EU team has asked the Central Bank and the Financial Regulator to use a new set of "tools" to explore the trends on SME loans, which amount to about €32bn.
Analysts believe SME loans could be the most difficult loan portfolio to manage over the next few years.
One analyst said deterioration in the SME loan books also feeds through to the mortgage books.
The last system-wide analysis of these loans, by accountancy firm Mazars in June, showed that of the €32bn of loans, more than one-third were overdue, "impaired" or on a so-called watch list.
Five banks -- Bank of Ireland, AIB, Ulster Bank, Anglo Irish Bank and National Irish Bank -- provided lending data for the study, which was collated by the Irish Banking Federation.
While the rate of deterioration is reported to be slowing down, some banks are believed to have bigger problems than others, because of their lending in the last years of the boom and because overdraft facilities have increased their exposures to certain customers.
A large segment of SME loans are extended to limited liability companies, so the level of recovery the bank can expect is lower than mortgage loans, which are fully recourse to the borrower, allowing the bank to pursue a borrower even if they voluntarily give up their home.
The Irish Independent has learnt that the Department of Finance itself, while supportive of lending targets into the SME sector, has reservations about whether they will achieve much.
For example, in recent years Royal Bank of Scotland set itself a lending target in Britain that it failed to reach and Lloyds found itself in a similar position.
The Financial Regulator has made it clear to the Department of Finance that forcing banks to lend in an indiscriminate way, even to SMEs, could be counter-productive.
The regulator has opposed any deliberate attempt to water down credit standards at this time.