Representative bodies for the Irish small business community, including the Irish Small and Medium Enterprises Association (ISME) and the Small Firms Association (SFA) have hit out angrily at the assertion made in a recent report on the activity of the Credit Review Office that state-supported banks AIB and Bank of Ireland are likely to fail to meet their EUR3bn lending target to small businesses because demand for credit is low.

In his fifth quarterly report, Credit Reviewer John Trethowan observed that:

"The demand for SME/Farm credit remains un-measured. A recent credible survey by the SME Finance Monitor for the Business Finance Taskforce in the UK has pointed to a lack of demand for credit there. In Ireland, there is widespread agreement that the saving rate in businesses and individuals is too high for an economic recovery to occur, but little recognition that a symptom of this is subdued demand for new lending. My interaction with the two banks on their EUR3bn lending targets also provides feedback on a sluggish demand for credit and the slow drawdown of sanctioned facilities."

He went on to explain that:

"We continue to extract assurances from both banks that whilst their Boards have a policy of downsizing their overall balance sheets that this is not affecting their appetite to fully support the SME / Farm sectors of the domestic economy. Recent Government and market supports have ensured that there is adequate capital for each bank to increase their lending. Both banks have outlined major programmes which are continuing nation-wide to reach out to customers with the message that they are open for business."

"Both Banks are however experiencing a continuing slowing demand for credit from SMEs, although farm credit is more buoyant reflecting increasing confidence in this sector. This slowdown in demand, coupled with high repayment inflows on existing lending, is reflected in a contraction of the SME /Farm books as existing loans continue to be repaid at a faster pace than new loans are being demanded."

And concluded:

"The rate of credit sales, and sanctioning, is lower this year than the figures from the previous year, and it will be a challenge for each of the banks to reach their EUR3Bn sanction target for new and restructured facilities in the current year."

However, the ISME has objected in fairly strong terms to the assertion that demand for credit has slowed, accusing the banks of telling "brass neck untruths" regarding the current situation.

The ISME Quarterly Bank Watch survey published earlier this month found that 58% of the companies questioned that had applied for funding in the last quarter had their applications refused (up from 54% in the previous quarter), whilst 64% of those polled felt that the banks are actively making it more difficult for small businesses to gain access to credit and extended bank facilities. An overwhelming majority (93%) told the ISME that in their opinion, government initiatives were having either a negative impact or no impact at all on lending to SMEs.

ISME Chief Executive, Mark Fielding argued that:

“The results of today’s survey make an absolute joke of the claims of the bankers representatives and their cheerleaders in the Credit Review Office that bank lending is readily accessible but the demand for SME credit is reduced. This excuse, used to justify why the banks will not reach their Government lending targets, is utter baloney, being peddled to get the bankers off the hook from their commitments in return for their rescue by tax payers’ money.”

He continued:

“The banks cannot take billions in rescue money from the taxpayer on the one hand and on the other threaten thousands of smaller businesses and the employment that they maintain and create. The Government must force them into lending to viable businesses or else reduce the protection from the State and the taxpayers, who have heavily contributed to their survival.”

The Small Firms Association, meanwhile, was similarly angered by the Credit Review Office report, with SFA Director, Patricia Callan, SFA Director stating that:

“It is unacceptable at a time when access to finance remains the single biggest issue for the small business community that the banks claim that the reason they can’t lend is because there is no demand. The banks must improve their efforts to communicate with customers that they are open for business, and this must be evidenced in having experienced staff in all branches that are able to make coherent business banking decisions, based on an assessment of the business-person and their business plan rather than security and personal guarantees.”

The Association argues that the banks are being hamstrung to a certain extent by the lending policies handed down by the Central Bank, and Callan suggested that:

“The banking system cannot return to efficient working, where the overseeing body, i.e. the Central Bank, is insisting that the banks be ultra risk averse, so as not to incur any more bad debt liability, in direct contrast to a whole raft of senior Government Ministers who espouse the importance of getting credit flowing to small businesses again, as an essential pre-requisite to growth and job maintenance and creation. The pendulum has clearly swung too far.”

Calling for the introduction of a " broad-based government-backed loan guarantee scheme" to be introduced "as a matter of urgency", the SFA chief stressed the importance of broad participation across the Irish banking sector in any future initiatives, rather than the focus being solely on AIB and Bank of Ireland.