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Radical plans for SME loan guarantees rejected

A senior official from the Department of Finance has shot down a radical proposal from the banks and the SME sector for the Government to guarantee new loans issued to small businesses struggling for credit.

The proposal was put before the Credit Supply Group during meetings in recent months, the Irish Independent has learned.

However, John Thompson, a senior official, rejected the idea saying the taxpayer could not be expected to, as he saw it, further bail out the banks -- which have benefited from liability guarantees, capital injections and the National Asset Management Agency (NAMA) plan.

The group has met four times in 2009 and is due to meet again at the end of this month.

The proposal may re-surface at that meeting, sources indicated. It is understood another top official from the Department of Enterprise, Trade and Employment, Brian Whitney, also rejected the idea.

However, bank representatives on the group, plus an Enterprise Ireland member, were supportive of the idea. ISME (Irish Small and Medium Enterprises association) and the Small Firms Association were also very supportive of the guarantee idea.

The department yesterday declined to comment on Mr Thompson's input to the committee, but provided the following statement: "The priority is to ensure credit is made available to viable businesses". It said Finance Minister Brian Lenihan has set up a credit review system to help achieve this.

It is understood Mr Thompson and other department officials believe a guarantee could create incentives for bank executives to lend but without taking proper account of risk. A senior department source said: "There can be problems with individual branch managers impeding the flow of credit, but providing guarantees, while popular with the banks and the SMEs, is not the best route."

The source said similar schemes operated in Europe, but in many cases they had not contributed to a major increase in loan approvals. Proponents of a loan guarantee scheme envisage something along the lines of the UK system, which was tweaked early last year.

In effect, they would look to have the State cover 75pc of the so-called 'residual' loan value -- above what is already covered by collateral at the time the loan is agreed.

For instance, if an SME is looking for €10m and has offered collateral to the tune of €8m, a loan guarantee would see the Government cover 75pc of the remaining €2m, with the hit on the first 25pc of a loan that turns sour being taken by the bank. They insist that a guarantee scheme would really only benefit borderline cases that would otherwise have been refused a loan.

Irish Independent