Richard Curran: Enda meets and greets in search of foreign funds for Irish SMEs
IT is becoming increasingly difficult to understand what is going on in relation to bank lending to SMEs. Small businesses say the banks are improving, but in general are either not interested in lending to them, are too cautious and risk-averse or will lend only to a handful of businesses but at very high interest rates.
The banks say the balance sheets of Irish SMEs are shot to pieces in many cases. The demand for credit has not been that great in recent years anyway. And Irish banks are meeting the SME lending targets set down for them -- which included €3bn in 2011, €3.5bn in 2012 and around €4bn in 2013.
Ulster Bank announced last week that it had set aside €1.2bn credit for firms of all sizes seeking to grow and that this was available to both new and existing customers.
Some banks are lending to a lot of farmers as the sector grows and using those figures to fulfil their SME targets.
If there is enough finance available to meet suitably qualified SME borrowers, then why has the Government gone to Berlin to get the German state development bank KfW to make cheap funds available in Ireland to SMEs? Just last week, while in the Qatari capital of Doha, Taoiseach Enda Kenny met the Qatar Investment Authority.
One of the topics on the agenda was the possibility of its state authority providing funding for SMEs.
So, the Government, which owns the biggest bank in the country, at a cost of €16bn, is scouring the world to find other banks to provide finance for SMEs. In the case of the German KfW, it doesn't have branches or customer deposits but lends money around the world through different networks.
In Ireland's case, it appears as if the KfW funds may even become available through the Irish banks themselves. How on earth will that work?
If the banks here are right, and there is a very limited number of suitable bankable SME customers, then how can they compete against themselves in lending to them?
The whole idea behind the KfW and possibly any Qatari initiative is that these institutions can borrow cheaply and therefore provide a pot of money to an Irish lender at a low rate. This could see SME borrowers access the funds at let's say 2 per cent, when it might otherwise cost 4.5 per cent through an Irish bank.
Last summer KfW agreed to raise €800m on money markets to lend to a Spanish development bank called ICO. Spanish owners of SMEs can then apply for low-interest, KfW/ICO-backed loans through their own local banks.
So, perhaps Irish banks could use the cheap German funding as a way to provide loans to SMEs at lower rates. That way, they won't actually be competing against themselves.
That is potentially good news for Irish SMEs. But it will be very difficult to see how it will work in practice.
Ireland's sovereign bond rates have been falling. Is there not a case to try to build something more lasting in Ireland?
If we had a State-owned commercial bank, it could provide loans. We had -- it was called ICC. A similar sell-off of ACC also looks ill-conceived now.
KfW will only want its money provided to end customers that fit its criteria and that are in lower-risk businesses.
One option is that the German KfW funds or Middle Eastern money would be set aside for particular sectors and types of business.
This is where the definition of an SME comes in.
KfW lent out around €73bn of loans around the world in 2012. About 40 per cent of that was for environmental and climate change projects. A big chunk went to German SMEs. A European definition of an SME is one that employs 250 people or fewer.
In Ireland, when we think SME, we tend to think of a small shop, a little service company or a man with a van. Irish SMEs account for the vast majority of Irish enterprises, employing around 70 per cent of the private sector workforce. An overwhelming majority of them are micro-firms employing fewer than 10 people.
Central Bank studies have found that Irish SMEs are disproportionately reliant on bank funding compared to their EU counterparts.
Around 50 per cent of all SME loans are in some kind of trouble, accounting for several billion euro. What will the Germans make of that?
Providing cheaper funding for small business is a good idea. But if there are enough good bankable SMEs out there, is there not a business case for an international business bank to come in, set up a presence and compete directly with existing banks?
Competition is the lifeblood of real value. The Government plan may help but it won't be a lasting long-term solution to a problem that has to be fixed.