Debt issue must be tackled for new lending bank to succeed
The SBCI is a positive move for SMEs but the negative-equity generation must be freed up to borrow
Published 13/07/2014 | 02:30
Wedged between Garth Brooks on Wednesday and Cabinet musical chairs on Friday, something very useful happened in the Dail on Thursday. Legislation was passed to create a new publicly owned bank. The bank could lend up to €5bn to small-and medium-sized companies (SMEs) in Ireland. If this can be matched with policies to tackle over-indebtedness, we might start to see new investment . . . leading to that all-important economic growth and job creation.
The new bank will be called the Strategic Banking Corporation of Ireland (SBCI). It's based on existing models in countries such as France, Germany and Canada, and will work as follows: The Government will put in €250m, with more than that again coming from the European Investment Bank (EIB) and a publicly owned German development bank called Kreditanstalt fur Wiederaufbau (KfW).
So, to begin with, there'll be somewhere between €500m and €1bn available for SME lending. The SBCI won't lend the money directly to SMEs. It will lend it in tranches to 'on-lenders', such as existing banks and. possibly, credit unions. Critically, these on-lenders will bear the risk of the loans to the SMEs, minimising the risk to the public money.
Irish companies will benefit in at least three important ways from this new bank. First, it will make capital available, specifically to help SMEs invest and grow their businesses. The banks are killed telling us they're already lending to SMEs, but anyone running a business in Ireland will tell you how difficult it's become to access investment finance. The numbers are pretty stark - between 2007 and 2011, the amount loaned to SMEs in Ireland fell by nearly 80pc. The SBCI can lend out up to €5bn - enough, at least, to get things started. And if it proves a roaring success, there's nothing to stop the Oireachtas increasing the €5bn cap. It's impossible to say at this stage how much demand there will be, though it's worth noting that in Germany, KfW provides about 80pc of all financing to SMEs.
The second benefit to SMEs is that the on-lenders, such as Bank of Ireland and AIB, will offer lower interest rates on the loans than they do at present. The SBCI's money is State-guaranteed, so it comes at low interest rates. While the on-lenders will make a margin on the transactions, much of the benefit of the lower rates will be passed on to the SMEs.
The third benefit is that the loans made using SBCI money will be more flexible than the banks currently offer. For example, repayment periods might be longer or interest holidays might apply. The combination of these three benefits could be very powerful. More money, at lower cost, provided more flexibly, should open up all sorts of new investment opportunities. Many investments take time to pay back, like buying a new machine to bend steel, developing a software product, or expanding a cafe. Loans requiring immediate repayment make these types of investments impossible - something causing huge frustration in our business community these days.
The biggest risk of failure of the new initiative is that, while it addresses the supply of credit, not nearly enough is being done to address the lack of demand for that credit.
While the SBCI initiative is the most ambitious effort yet to get investment loans flowing to SMEs, it's far from the first. In 2010, Fianna Fail set up Innovation Fund Ireland with €500m. In 2012, the current Government established a €450m Credit Guarantee Scheme and a €40m Microenterprise Loan Fund Scheme. In 2013, we got the Development Capital Scheme at €225m and the Seed and Venture Capital Scheme at €175m. Lots of money made available in lots of different ways - but there have been relatively few takers.
The Credit Guarantee Scheme was meant to lend out about €150m a year. In its first year it did about one-twentieth of that. As of late 2013, the Microenterprise Loan Fund Scheme had only approved 79 loans.
A large part of the problem is that existing SMEs, their owners, their employees and their customers have too much debt. The average age of founders of successful high-tech start-ups in the US is 39. That's right slap-bang in the middle of the negative-equity generation here. The would-be entrepreneurs, who should be borrowing, investing and creating jobs, are too busy paying down huge mortgages on small houses and apartments. Making lots of money available to them to borrow cheaply and flexibly doesn't matter - they don't want it - they are part of a generation who have too much debt to consider borrowing any more. And, of course, there's the psychology - it's fair to say that most people in the negative-equity generation are allergic to debt, regardless of whether they think it's for a good investment.
The good news is that we already know how to solve this problem. Earlier this year I introduced a bill that would radically change the examinership process - by taking it out of the courts, simplifying it and addressing upward-only rents. The bill was opposed on entirely spurious grounds, with the Constitution thrown in for good measure. The bill could be easily re-introduced, with whatever changes are deemed necessary. This would help viable SMEs quickly restructure unsustainable debts, allowing them think about future investment.
On the personal indebtedness side, the Finance Committee earlier this week published a cross-party report on how to tackle the mortgage crisis. The report contains 47 recommendations, covering sustainability, consistency, transparency, preferable products, supports for borrowers, the insolvency process and a range of other areas. If even half of the recommendations were implemented, tens of thousands of families, including the owners, employees and customers of SMEs, would be able to participate productively in the economy, with no additional public money required for the banks.
Ireland is over-reliant on foreign direct investment. We need a vibrant and growing domestic enterprise sector. Setting up the Strategic Banking Corporation of Ireland is a strong move. If it is to work, it must be matched, with equal strength, in tackling unsustainable business and personal debt. Doing both would give Ireland the best chance yet of sustained social and economic recovery.