The Minister for Finance, Brian Lenihan, TD today released the findings of the independent “Review of Lending to SMEs”, conducted by Mazars.

The Mazars survey revealed a 24% decline rate for SME lending. Patricia Callan, SFA Director commented: “When a small business fails, it is not because it runs out of customers, ideas or products. It simply runs out of money. With one in four small businesses in Ireland not getting enough credit, we have a very serious problem, with potentially 62,500 small business closures and 200,000 jobs lost as a result.”

The Report clearly shows the serious pressure small businesses are facing in order to survive with 22% of SME loans “on watch” or “impaired” at the end of February 2009. “This is a dramatic deterioration of 8% in 9 months and indicators are that it has only worsened since then”, commented Callan.

“One of the most worrying findings in the survey is the apparent shrinking of competition in the SME banking marketplace. This is noted both in the huge variation of decline rates between banks, which varied from 18% to 33% and the change in credit pricing, with some banks having been engaged in below cost pricing prior to the crisis, as businesses having been approved for lending in multiple banks could negotiate better rates,” stated Callan. “From the evidence available to us, our assessment is that due to the capital requirements being imposed on international banks, they are concentrating on their home markets and are restricted in their ability to compete in the Irish marketplace. With only 2 main Irish banks, we are concerned that the competition factor from which Irish small businesses have benefited so much over the past decade, will be erased”, commented Callan.

The Small Firms Association believes that the Report demonstrates that there is now clearly a market failure in the provision of SME lending, as the banks risk assessment criteria means that they will not be changing their current pattern of lending decisions and thus it is essential that the government intervenes directly to share this risk with the banks and thus move their risk-assessment decision. “Such credit guarantee schemes are already widely in most OECD countries”, commented Callan.

She also noted that thus far not one Irish bank has drawn down the money provided by the EU Commission’s Competitiveness and Innovation Programme. The SME Guarantee Facility (SMEG) has a fund of €506mn available to give to banks around Europe, through the European Investment Fund (EIF), to provide an SME loan guarantee scheme of 50% of the potential losses of a particular portfolio of loans from a given bank, and in the case of micro-credit (loans up to €25,000), a guarantee rate of 75% in the event of losses. “This instrument should be widely used by banks, as it clearly allows them to make decisions in a less risk adverse way, as that risk is being shared with the EIF. This should allow them back more businesses and/or reduce the collateral and conditions they set with particular clients, to enable them to drawdown the money they desperately need”, commented Callan.

In calling for the recommendations contained in the Mazars report to be implemented immediately, Callan concluded: “Unless we are reconciling ourselves to seeing more and more jobs lost and an implosion in the number of businesses shutting down, we clearly need action, not more analysis, by Government immediately”.