Maeve Dineen: Shortage of viable small businesses the real reason banks are not lending
One of the big myths of the downturn is that the reason the slump persists is that banks are refusing to lend to small to medium enterprises (SMEs). The story goes that because the banks have taken such big hits to their capital, they no longer have the money to lend out.
The reality is much more complex. True, a lot of SMEs are struggling to get access to credit but it's too easy to say banks aren't lending or to call on the banks to lend more. A throwaway line in last week's IMF review of Ireland pointed out that many of the smaller property loans of €20m or less -- once destined for NAMA -- will have to be handled by banks, as they were taken out by a local SME.
The banks, the IMF says, are better placed to deal with smaller land and development loans, as these loans are often "cross-guaranteed" by SMEs.
And therein lies the problem: many SMEs are failing because their business is simply not viable and probably should never have received credit during the boom years; or, and this is more likely, the business is failing because it is in some way tied up with the collapsed property market.
Bank of Ireland and AIB have signed a deal with the Government to provide €12bn in credit to firms over the next two years. This morning John Trethowan, of the Credit Review Office, will reveal if that commitment is being met.
This is one target the banks won't want to miss. But the devil will be in the detail. Yes, the banks are lending, but much of it is going to restructuring existing debts. Very few start-up loans are emerging.
According to a number of those who work in banking, here is what happens in the SME lending section these days: a restaurant wants to increase its overdraft, pleading to be helped until the good times roll again.
"His problem is not lack of credit, it is lack of customers," the banker says. "Lending more won't bring them back. And having leased the restaurant building for years, he bought it in 2007. Better to call it a day now." So, it's a no.
How about the bicycle shop that borrowed a few years ago to diversify into rural tourism? Well actually, he didn't quite invest in the rural bike trekking in the end -- instead he bought an old warehouse and converted it into four apartments. True, the bike shop is still ticking over but the flats have been empty for 12 months and they are putting serious pressure on his finances. So, it's a no again.
"He'll have to lay off the few staff he has and try to offload the flats and come up with a recovery plan. That's the only way he'll save his bicycle shop," the banker says as he shakes his head.
Identifying a viable small business these days is difficult. This may have a lot to do with the fact that after years of lending to the property market, bankers have a lack of knowledge about small business lending. This is something that must be addressed by our two new 'pillar banks'.
The very banker who once used lending rules as guidelines is now petrified to give out the few bob to those who don't meet the extremely strict lending criteria set out by the Financial Regulator.
Since this crisis began we're complaining about our banks lending policies. But we can't pick and choose the lending terms and conditions we want to abide by -- this is what bankrupted the country in the first place