Tuesday 25 October 2016

Bank of Ireland blasts Central Bank over SME loan proposals

Published 08/10/2015 | 02:30

The Central Bank.
The Central Bank.

Bank of Ireland has strongly criticised proposals from the Central Bank that would require lenders to increase the amount of information they give to small and medium-sized businesses looking for credit.

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The Central Bank launched a public consultation period earlier this year as part of a review of the Code of Conduct for Business Lending to SMEs. Under the proposed changes, lenders would be required to provide reasons for declining credit that are specific to the application.

But in its response to the consultation, Bank of Ireland argued the proposed measures are "unparalleled in an EU and international context", would have a negative impact on customers, and will do little, if anything, to improve the flow of credit to the SME sector. It also accused Dame Street of failing to carry out an impact analysis on the proposed revisions.


"It is the view of the bank (of Ireland) that these proposals - which are not grounded in an appropriate analysis of their potential impact on SMEs or lenders - may have a number of substantive, negative consequences should they be introduced," Bank of Ireland said in its submission.

In addition, the Department of Finance, in its submission from second secretary general Ann Nolan, said that the Central Bank needed to satisfy itself that the measures would support the availability of credit, and warned placing additional and unnecessary administrative procedures could hamper the economic recovery.

The Code of Conduct for Business Lending to Small and Medium Enterprises was originally introduced in 2009, setting out protections for SMEs when accessing credit or in financial trouble. A 'limited' review was carried out in 2011, focusing on the financial difficulties provision, with new and amended provisions introduced from January 1, 2012. In January, Dame Street announced it was seeking views on enhanced protections, including requirements for lenders to provide reasons in writing for declining credit that are specific to the application, increased information to borrowers about their policies for dealing with financial difficulties, including the implications for borrowers of not co-operating, and expanding the appeals provisions to include decisions on declining or withdrawing credit and decisions regarding terms and conditions.

Bank of Ireland said the proposed code would have a negative impact on customer experience in terms of speed of response and perceived ease of doing business. It also claimed the proposed Code would add to the perceived complexity of lending to business in Ireland and would deter market entrants. It added that an evidence-based need for change had not been provided, and said no rigourous impact analysis had been carried out.

"It is the view of BoI that a detailed impact analysis would have highlighted the range of considerations which are detailed in this submission," it said.

By contrast, however, the proposed measures have been broadly backed by groups representing small businesses. In its submission, the Irish Small and Medium Enterprises Association (Isme) said its members are "frequently frustrated" by the lack of detail received when a credit application is rejected.

"Standard letters must not be sent when banks are informing SMEs of a rejection of their credit application," the Isme submission stated. "The consultation paper states that it was presented to the Central Bank that more detailed information was provided to applicants verbally, however, in a number of cases SME lenders did not have a record of these discussions."

The Credit Review Office also appeared to broadly back the proposals, stating banks should be obligated to set out all the reasons for declining credit in the response letter.

"The purpose of the decline letter should specifically explain why the credit application was declined, and, where appropriate, it should set out what the applicant might do to improve their chances of obtaining approval in future applications," the review office said.

In its submission, the Department of Finance said the proposed new regulations are considerably more detailed than the existing SME code, and in this regard, may increase the regulatory burden on banks.

"The Department would be particularly concerned if the additional requirements being placed on lenders had the effect of reducing the availability or adding to the cost of credit for viable and sustainable business proposals from SMEs."

The Central Bank said it had received eleven submissions from a variety of groups representing SME bodies, industry, government departments and statutory bodies.

"We are currently finalising the draft regulations and hope to publish the regulations by the end of the year," it said.

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