Irish businesses face among the highest rejection rates for loans in the euro zone, according to a new report, which has prompted critics to claim Dublin’s 64 billion euro ($80.2 billion) rescue of its banks is not benefiting the wider economy.
The report by Ireland’s central bank shows a quarter of applications for loans or overdrafts by small and medium sized businesses are being refused — the second highest rejection rate behind Greece, which has seen loan rejection rates surge to more than 40 percent as the euro zone crisis intensified.
The share of “discouraged borrowers” — companies that do not apply for loans despite requiring credit — is also highest in Greece and Ireland, where 21.2 percent and 14.8 percent of companies respectively did not apply for loans for fear of rejection.
“High rejection rates in Ireland cannot be explained by weak demand or the quality of the pool of potential borrowers in Ireland, thus suggesting that the high rejection rates observed in Ireland represent supply side constraints faced by Irish SMEs,” says the report — an economic analysis by Central Bank staff of data compiled by the European Central Bank , European Commission and Department of Finance.
Despite a slight improvement in loan rejection rates and credit conditions in the six months between September 2011 and March 2012, the report concludes that immediate government action is required, as credit constrained firms are more likely to shed jobs, close down, spend less on technology and refrain from entering new markets.
Irish taxpayers have so far spent 64 billion euros shoring up its banking system, which teetered on the brink of collapse in 2010 following the bursting of a massive property bubble that led to the country’s international bailout. Dublin has justified its bank rescue in terms of the need to get credit flowing in the wider economy and boost growth, while Irish banks have consistently said they are continuing to lend to companies.
However, the report shows lending to SMEs fell sharply to 407 million in the first quarter of 2012, compared to 700 million in the fourth quarter of 2010, prompting opposition parties to criticize the government for prioritizing banks over jobs.
“The government’s main priority has been to shore up the banks, while the need to create employment has played second fiddle,” Peadar Toibin, a Sinn Féin member of parliament, told the Financial Times. State-owned banks should be directed to lend more, or a portion of these banks should be hived off into a separate institution capable of lending to SMEs, he said.
Dublin has set SME lending targets for the two main Irish banks – Allied Irish Banks and Bank of Ireland – which it insists have so far been met. But lobby groups for the small business sector complain many of their members are being refused loans.
“The targets are probably not specific enough as they can include the rollover of existing loan facilities and the number of loans sanctioned, rather than the amount drawn down,” said Dermot O’Leary, economist with Goodbody Stockbrokers.
It was no surprise that banks were not lending, as the troika has set targets for shrinking the banks’ loan books as part of a major restructuring of the banking sector, he said.
The Irish Bankers Federation, a lobby group representing the banks, rejected the central bank report, which it described as adopting “a populist line”.
Pat Farrell, chief executive of the Irish Bankers Federation, told Irish radio the report seemed to be saying something completely different from previous reports undertaken by the government on bank lending to SMEs, which found they were meeting their lending targets.
A spokesman for the Department of Finance said the government was fully aware that conditions remained difficult for SMEs, but pointed out that the situation had improved over the past 12 months.