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Banks must lend more to small business

It may have merely confirmed what many of us had long suspected, but Central Bank governor Patrick Honohan's comments yesterday that credit conditions for small and medium-sized enterprises (SMEs) are the worst in the eurozone were still extremely significant.

We have all heard horror stories of small businesses that have had their overdrafts slashed, loan applications refused and interest rates jacked up by their banks.

At a time when they are most in need of financial assistance, many small businesses are finding that their banks are kicking them in the teeth instead.

Yesterday, Professor Honohan weighed into the debate. Opening a Central Bank conference on lending to SMEs, he said that credit conditions for Irish SMEs were worse than the eurozone average, both in terms of cost and availability.

While acknowledging that, in a steep economic downturn, many SMEs would be refused credit by their banks for the very simple reason they were not creditworthy and the bank could not be sure of getting its money back, he stated that the problem went deeper than mere caution on the part of the banks.

The evidence, said Prof Honohan, "strongly suggests" the problem went much further than that.

Research conducted by the Central Bank and presented at yesterday's conference shows that credit conditions for Irish SMEs, including the size of loans, the level of collateral demanded by banks as well as the interest rate and fees charged were much less favourable in Ireland than the eurozone average.

And the bad news is that things are going to get even worse.

Since the financial crisis first struck in 2008 several lenders have exited the SME market. This reduction in competition means that the remaining lenders can pretty much charge borrowers what they like and impose whatever conditions, no matter how onerous, they choose.

The implications for this credit squeeze on SMEs are extremely serious.

Approximately 800,000 people, close to 45pc of all those who still have a job, are employed by SMEs.

The inability of many of these companies to borrow money risks making the current economic downturn even more severe than it needs to be.

However, it is not enough for Prof Honohan to merely express his concern at this problem. The Irish-owned banks were bailed out with €63bn of taxpayers' money -- a move that effectively bankrupted the sovereign Irish state.

Instead, Prof Honohan must be prepared to use the power of the institution which he leads to force the banks to do what needs to be done. While gestures such as the Government's loan guarantee scheme, which will guarantee up to €150m of new loans to SMEs this year, are welcome, more, much more needs to be done.

Irish Independent