ALLIED Irish Banks and Bank of Ireland will have to lend €15bn between them to small business over the next two years under new targets set out by the Department of Finance.
The targets, outlined yesterday in the Credit Review Office's (CRO) quarterly report on small- and medium-sized bank lending, came as the two firms hit their targets for 2011.
Under the new plan, each of the so-called 'pillar banks' will be compelled to lend €3.5bn to small and medium enterprises this year, followed by an additional €4bn each in 2013.
That lending can take the form of new loans or restructuring old debt. Last year, the majority of lending to SMEs involved restructuring.
Despite the agreement on the higher targets, sources in the banking sector questioned the validity of the targets, and pointed to a recent report from the accountants Mazars, which showed falling demand for credit from the SME sector. The higher targets come after a year in which the two banks seemed to struggle to lend the required €3bn to SMEs.
CRO head John Trethowan warned during the summer the banks would be "challenged" to hit their targets and it was only after some "robust" meetings between the banks, the Department of Finance and Mr Trethowan that those targets were met.
Mr Trethowan adjudicates on decisions by the banks to deny credit applications that are appealed by the borrower to the CRO. In effect, he is the final decider on SME borrowing applications.
The tougher objectives were revealed as the CRO published its latest quarterly report on the state of bank lending to small firms.
The report shows the CRO received 22 new formal applications in the last three months and, of the 94 cases that have been concluded, Mr Trethowan has overturned the bank's original decision 51 times, releasing more than €4.7m.
Despite the relatively small number of cases concluded, Mr Trethowan criticised the banks for what he called "overly rigid" lending policies.
"I continue to see too many cases where the fundamental and common-sense question of whether the bank will get its money repaid is being crowded out by adherence to overly rigid lending policies and procedures," he said.
He also defended the lack of "new money" being doled out.
"Without the [restructuring of loans] many more businesses would fail, having a knock-on effect throughout the economy."