Tuesday 20 March 2018

The toxic mixture of bank lending and small firms

Lenders insist they are open for 'good' business

Laura Noonan

BANKING is full of minefields, but few things are as likely to get a bank boss instantly riled up as the thorny topic of lending to small businesses.

The change in their demeanour is visible, the mood instantly shifts to a combination of defensiveness and sheer frustration as they insist they're ready and willing to lend -- they just can't make people believe them.

"It's not as if we have to be dragged kicking and screaming to do good lending, we want to do good lending," exclaims one banker when asked if his organisation will meet its government-imposed lending targets

Bankers admit though, that they have a "lot of work to do" to knock down the barriers that have cropped up between businesses and banks, to undo the perception that it's "us against them".

As the chaotic lending of the boom came home to roost, banks moved to overhaul their lending structures and the way they make credit decisions.


The problem is that many businesses, and even people within some banks, feel the new structures have gone so far in the direction of caution that they've crossed the boundary into downright obstruction.

Word on the street has it that AIB executive chairman David Hodgkinson personally approves every loan over a couple of million. Sources close to the bank categorically deny this, but they admit the approvals process is "different" than in the boom.

Loans for hundreds of millions are dealt with by the board, they say, but everything else is sanctioned by "credit committees in the normal way", with small business dealt with through a 270-strong branch network and larger customers processed through 14 commercial centres.

The bank believes the new processes are efficient, that getting two pairs of eyes to look over everything should take no longer than getting one, but customers still speak of hold-ups and red tape.

Over at Bank of Ireland (BoI), SME loans are also being looked at more closely than ever before.

The bank escalates loans to higher levels of credit committees depending mainly on their risk profile rather than on size.

In recent years the threshold for escalation has gotten lower, though sources insist the process has been "gradual".

"It's about getting the right balance between prudence and speed," admits one senior banker. "We wouldn't be claiming to be completely there yet."

Despite subjecting loan applications to increased scrutiny, banks continue to insist they are eager to lend -- they just need to make sure they lend to the right people so they don't lose another big chunk of money.

BoI, in particular, seems to see the current environment as a great opportunity to use its financial firepower to forge new relationships with SMEs, while AIB is more pre-occupied with dealing with the SME customers it already has.

Both banks are expected to sanction loans for €3bn a year, as a quid pro quo for the significant state support they've gotten.

The figure is a target rather than a requirement, and earlier this week the Government's credit czar John Trethowan said it would be a "challenge" for the banks to meet it this year due to weak demand.

BoI, which is sanctioning 15,000 loans a quarter, still thinks the €3bn is within sight. AIB, which is offering 9,000 loans a quarter, appears less confident of hitting the €3bn mark.

It's not like SMEs are turning en masse from the Irish banks to foreign players. KBC, Ulster are all still in the market for SME lending but they've described the demand they are seeing as "extremely subdued" or "very weak".

The reluctance of companies to apply for loans gives us the obvious insights into the economy, but it also confirms what most senior bankers claim already -- that some businesses aren't coming forward for credit because they think their bank won't lend, or because they think bringing themselves to their bankers' attention is going to lead to their existing facilities being reviewed.


"We still need to sit down with SMEs and really bottom out what the issues are here," said one senior banker.

The high number of sanctions also does little to address SMEs' consistent claim that banks are rejecting loan applications left, right and centre, despite the tiny numbers of claims upheld by Mr Trethowan's office.

At the end of July, AIB embarked on an ambitious programme to track every single loan inquiry, however informal, and work out why that inquiry didn't result in a loan sanction.

The results may confirm some unpalatable truths -- like widely reported anecdotes of bankers quietly advising people that there's no point in going ahead with applications because they won't be successful.

But it's only by confronting those facts, and SMEs' many other concerns, that the troubled relationship between small businesses and Ireland's banks can finally move on. And then SME lending can finally stop being such an uncomfortable topic.

Irish Independent

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