Business Irish

Sunday 25 August 2019

Small business loans worth €875m classified as 'highly vulnerable'

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David Chance

SMALL businesses that have taken out term loans and use overdraft facilities as finance account for over 90pc of €875 million in loans that are classified as “high vulnerability” according to new research by the Central Bank of Ireland.

The survey covered €12bn of loans made to small and medium sized businesses made by AIB, Bank of Ireland and Permanent TSB and found that 7.3pc of total performing balances were in this high risk category.

“Accommodation & Food and Wholesale & Retail borrowers account for a large share of high vulnerability balances, while borrowers in the Agriculture, Forestry & Fishing and Manufacturing sectors are under-represented relative to their share of outstanding credit,” Economist Niall McGeever wrote in the report published on Friday.

The report said that 10pc of term loans, which accounted for 70pc of balances are often used by smalls businesses to buy equipment and buildings, were vulnerable, and a similar figure among overdrafts were similarly classified.

Term loans originating in 2005-6, the period immediately before the financial crisis, and 2013-14, the period immediately after the crisis, had the highest proportion of vulnerable loans.

Agriculture, food, forestry, accommodation and whole sale and retail accounted for half of all the loan balances, something that in part reflects the preponderance of domestic businesses in the economy whereas tech and manufacturing are dominated by foreign investors.

Dr McGeever noted that small and medium sized businesses had deleveraged significantly since the financial crisis and that the number of these businesses with no debt had risen to 50pc by 2017 from a quarter in 2013 while average debt to turnover had fallen to 31pc from 48pc in the same period.

Small businesses here pay much higher interest rates than in the rest of the euro area, according to a the annual Cost of Doing Business in Ireland report from the National Competitiveness Council, which found that Irish loans of less than €250,000 had an average interest rate of 5.5pc compared with just 2.2pc in the euro area.

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