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Irish banks must pass cheap credit on to smaller firms



Interest rates: Marie Finnegan calls on banks to boost lending to SMEs

Interest rates: Marie Finnegan calls on banks to boost lending to SMEs

Interest rates: Marie Finnegan calls on banks to boost lending to SMEs

Last week, the Central Bank released data which showed that new lending to Small and Medium Sized Enterprises (SMEs) stood at €727m over Q2 2020.

This is 50pc lower than the same quarter in 2019 and the lowest volume since Q3 2014. Moreover, the cost of this credit increased. The interest rate on new SME loan drawdowns rose marginally by 17 basis points in Q2 2020, and now stands at 4.22pc.

Demand for credit may be down because SMEs are reluctant to take on more debt due to heightened uncertainty. Some, we know, have stopped trading completely. As against this however, the Central Bank said that in June, the commercial banks reported that SME credit demand increased in Q2 and is expected to increase further in Q3.

So that brings us to supply. In March, the European Central Bank (ECB) embarked on a process designed to increase the supply of credit to SMEs at low rates to help mitigate the impact of Covid-19 on the economy.

Foremost among these was a series of asset purchases under the pandemic emergency purchase programme. In total, this package is worth €1,350bn, while the asset purchases themselves will continue until at least the end of June 2021.

This is on top of approximately €20bn a month in asset purchases since November 2019. The theory, in part, is that as the ECB buys bonds from banks, the banks will lend out a proportion of the funds they receive.

Since the end of June, banks have been able to borrow from the ECB for as little as minus 1pc, if they can show that they are borrowing specifically to make loans to those hardest hit by the spread of the virus, and that includes SMEs.

The Central Bank has also made it easier for the banks to lend. They have relaxed the amount of capital commercial banks must hold in relation to the loans the make from June. Specifically, they have reduced the 'countercyclical capital buffer' (CCyB) rate on domestic exposures from 1pc to 0pc.

Again the aim here is to ensure banks maintain a sustainable supply of credit to the economy and limit the scope for the banking system to amplify the shock to the detriment of the real economy. So far, these measures are not getting passed on by Irish banks to SMEs.

SMEs account for nearly 99pc of the total number of private enterprises and 68pc of all private sector employment. This makes them a priority for the transmission of monetary policy to the real economy. Moreover, sufficient and cheap credit from banks is especially important for SMEs who are more reliant on bank-based credit as they try to stay afloat during the pandemic.

Covid-19 has had a disproportionate impact on SMEs, particularly in retail, food and beverage, accommodation, tourism and travel. The Banking and Payments Federation reported in August that SMEs in the services sector account for more than 51pc of all active enterprises and around 47pc of employment in this sector.

SMEs are currently being supported by a variety of State aids from the restart grant to the credit guarantee scheme. The Central Statistics Office reported that during June, 62.5pc of SME respondents indicated that they had availed of government supports during the Covid-19 crisis.

SMEs are also availing of tax, landlord and bank forbearance. The Central Bank reported last week that repayments on SME loans in Q2 2020 declined 39pc from the same period last year. This forbearance cannot last forever.

A more sustainable approach to SME credit over the medium term is needed in terms of increased lending at lower rates. This is more important as Ireland is now officially in a recession. Modified domestic demand which strips out the impact of multinationals decreased by 16.4pc in Q2 2020 from Q1 2020.

Everything is in place for banks to play their part in delivering. They just have to do it.

Marie Finnegan is a Lecturer in Economics at GMIT's School of Business

Irish Independent