Banks 'forced' to do deals with struggling SMEs
BANKS will be forced to do deals with the thousands of small business owners whose companies are swamped in debt and struggling to survive.
It is hoped the drive by the Central Bank will help kick-start a recovery for many small businesses teetering on the brink and drowning in debt.
However, it could also force a number of businesses into examinership and many more will go to the wall as the banks attempt to further clean up their balance sheets.
The Irish Independent understands that the bank's strategy involves looking at the loan portfolios of all the small and medium businesses (SMEs) whose loans are in arrears, and deciding if they have the potential to survive or not.
It is somewhat similar to dealing with mortgage arrears and putting homeowners on a more solid footing. A source close to the process said: "The basic approach has similarities with that for mortgages: review the banks' operational capabilities and insist on strengthening them; encourage better management information; and, above all, to encourage efforts to tackle problems rather than just 'extend and pretend'.
"The Central Bank has received SME portfolio strategies from all the major banks and we are gearing up our engagement," the source said.
The source said there would be some differences to dealing with SME debt compared with dealing with mortgages.
He said that while the Central Bank would not be rolling out the same extensive regulatory framework it had done for mortgages, it would be pressing the banks to decisively tackle the restructuring problem with SME loans in an effort to boost a recovery.
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 almost €35bn.
Some bank analysts believe SME loans could be the most difficult loan portfolio to manage over the next few years. One said deterioration in the SME loan books also fed through to the mortgage books.
The last system-wide analysis of these loans was by accountancy firm Mazars in 2011, which showed cause for concern.
It found that of the €32bn of loans, more than one-third were overdue, "impaired" or on a so-called watchlist. This figure is understood to have jumped significantly since then.
In some cases, the banks are monitoring 45pc of SME loans in trouble. A number of banks have also started asking for personal guarantees, in order to extend a loan to small business customers.
Earlier this year, Central Bank deputy governor Matthew Elderfield said the banks had to face up to the issue of restructuring rather than just deferring problem SME loans.
He said that, while banks had begun addressing the issue of restructuring mortgage arrears, an in-depth analysis commissioned by the Central Bank showed that, to date, they had failed to show a similar appetite for facing up to the issue of problem SME arrears.
"The banks need to raise their game on the handling of problem SME loans," he warned.