Sunday 24 June 2018

Irish SMEs pay more to borrow than big firms or European rivals

Central Bank reveals rate gap
Central Bank reveals rate gap
Colm Kelpie

Colm Kelpie

Small and medium-sized businesses with loans of less than €250,000 are being hit with interest rates more than double those with debt of more than a €1m, new data shows.

The interest rate gap over the last two years has been at least three percentage points, according to the figures from the Central Bank.

And interest rates for businesses generally in Ireland remain "significantly above euro area averages", running at about two percentage points higher than other European countries.

But the data highlights in particular the discrepancies in the interest rate charged depending on the size of the loan.

"Rates on loans under €0.25m are used as a proxy for the SME cost of credit. Interest rates are higher for smaller loans," the Central Bank said, in its latest report looking at SME lending.

It added: "The three-month moving average interest rate for SMEs is 5pc for the latest data point, which is three percentage points higher than that for loans above €1m and 1.6 percentage points higher than that for loans between €0.25m and €1m."

Rates on SME loans continue to be among the highest in Europe, even though the issue has been repeatedly flagged in recent years. "The average interest rate on loans under €250,000 is currently 5pc in Ireland, down from late 2016 but remaining significantly higher than in comparator country groups," the Central Bank said.

"The premium paid on small versus large loans also remains substantially higher in Ireland."

Overall, new lending to SMEs in the non-financial and non-property related sectors grew by a third in the year to the end of March, with manufacturing, wholesale and retail experiencing strong growth.

The amount of money lent to SMEs in the first quarter totalled €3.6bn, a 32pc increase since the same period last year, and 38pc higher than in the first three months of 2015.

Compared to the first quarter of 2016, annualised new lending in the early months of this year rose across every sector.

In manufacturing it more than doubled, in hotels and restaurants lending was up by 95pc, while wholesale and retail up by 74.4pc.

Construction-related SMEs saw lending jump by 43.8pc, and by 21.5pc and 7.8pc in administrative services and agriculture respectively. The SME sector in the crisis years and early recovery suffered an acute shortage in lending, but this latest data presents a more positive picture.

Investment and working capital are the most common reasons cited by small and medium sized firms for financing applications.

The share of financing applications for investment reasons has grown from 36 to 47pc over the period from September of last year to March. The stock of outstanding credit is also going down, declining to €16.6bn, or over 8pc, in the first quarter. But the data also shows that the rejection rate on applications has increased from 11pc to 13pc over the year to the end of March.

Medium-sized firms have continued to experience a fall in rejection rates, while small and micro firms are experiencing increases. Rejections rates are high in a European context.

The SME lending market also remains highly concentrated. The market share of the three main lenders is currently 82pc.

Irish Independent

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