Small company lending suffers as big builders' debts increase
Fresh loans to stop builders going bankrupt mean a shortage of cash for small businesses. Library image
THE growing debts of struggling builders and developers is crowding out lending to the rest of the economy, especially small business, one analyst said yesterday.
Central Bank figures released on Tuesday showed lending to the property sector rose by €5bn in the three months to September. Much of this appears to be unpaid interest being added to loans, and fresh loans being made to prevent builders and developers going bankrupt.
"If one strips out all property lending, and deducts lending between financial entities too, credit growth to the rest of the economy is shrinking," Scott Rankin, analyst at Davy Stockbrokers, said.
Difficulties
"This is where one finds small companies, which are making their difficulties in accessing credit well-known to those in power," he said.
"The decline in credit in these sectors was 0.8pc in the third quarter, which followed a small gain of 0.2pc in the second quarter."
He said overall credit could begin to fall next year, especially after the typical January repayment of debt after the Christmas spending.
"Investors are well aware that credit growth in Ireland is slowing fast, which in normal circumstances would be consistent with an economy that is shrinking.
"However, funding availability and the need to preserve capital have added additional pressures to this trend," Mr Rankin said.
"These figures are the first proof that credit to business is falling. The Department of Finance has questioned that, because overall credit was growing; but the paradox is that the industry which is shrinking fastest is the one absorbing most of the credit growth."
"Everything points to credit actually contracting next year. We shall be looking to see if credit growth is less than what was reported for September -- a rise of €1.2bn on the month, giving an annualised rate of growth of no more than 3pc.
"As things stand, we have pencilled in low single-digit loan growth in Ireland for the banks next year; 3pc for AIB and 2pc for Bank of Ireland," he said.
Crisis
The banking crisis may also be diverting credit from other sectors of the economy. The biggest rise in lending was among institutions, with banks lending to non-bank credit providers (such as credit unions), life insurance and pension funds and the special purpose vehicles (SIVs) in which many banks placed mortgage and other assets.
This sector's share of total private credit has risen from 17pc in the third quarter of 2007 to 33pc in the three months to September last.
The figures also showed that personal consumer debt fell by €180m during the three months and was just 3pc higher than the same period last year.
- Brendan Keenan
