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Access to credit ‘toughest’ in Ireland, says Honohan

By CreditMan Sunday, March 4, 2012

Ireland is the most difficult country in the eurozone for small businesses to access credit, according to Central Bank governor Patrick Honohan.

Mr Honohan said credit was not flowing as freely in Ireland as in other European countries. Speaking at the opening of the Central Bank conference on the SME lending market yesterday, Mr Honohan said: "Credit conditions for SMEs are tougher in Ireland than anywhere elsewhere in the euro area both in terms of cost and availability."

Mr Honohan said the banking system was still emerging from the credit crisis and banks were un-willing to lend as by their assessments, very few firms are worth the risk. Even firms that previously would have had good working relationships with their bank may have over extended themselves in the boom.

"Many SMEs also got caught up in the property bubble so that their balance sheets are weighed down with under-water property investments that threaten their viability and discourage outside financiers from sending good money after bad.

"Working out such problem lending relationships is challenging at the best of times," said Mr Honohan.

Despite there being valid reasons for banks not to lend to many firms, some of the research presented at the conference reported even viable businesses were finding it difficult to get credit.

"The economy is operating at only about 85% of its previous level of productive activity: in such circumstances there have of course been a large number of small firms who cannot get credit because on any assessment, they are not creditworthy," said Mr Honohan.

"But the research reported in this conference strongly suggests that credit constraints go beyond that."

Mr Honohan praised Government efforts to force banks to lend. "What are the authorities doing about this? The answer is: a whole lot. The Government has arranged to recapitalise the main banks with fiscal injections almost unmatched — as a percentage of national GDP — in world history."

He highlighted the Credit Review Office and the proposed new partial credit guarantee scheme as good efforts to force the banks to increase their lending to businesses.

One of the paper’s presented at the conference by Central Bank economist Fergal McCann found a key factor in securing loans was previous experience in applying for loans.

"Overall, we find that larger and older firms face the lowest risk of having loan applications rejected, but that age and size are less important for firms’ perceptions of credit availability than they were for actual experience of obtaining a loan," his paper said.

Mr McCann’s research also found there had been a shift in which sectors were receiving credit.

Sectors that had been associated with boom time lending were out of favour with banks while agriculture, industry and business service firms are now receiving a higher percentage of bank lending.