Cautious banks are causing loan headaches for small companies
The banks in Northern Ireland have questions to answer.
After a long period of uncertainty and critical comment, there is now evidence from a large EU-wide survey by Eurostat of the degree to which small and medium-sized businesses (SMEs) have been frustrated by being unable to get access to bank loans.
In 2010, the local success rate in obtaining a bank loan fell to 65% of all SME applicants. For comparison, this success rate of 65% was exactly the same as in a UK-wide response.
Although some 65% of applications were successful in 2010, this was a sharp fall from the Northern Ireland 92% success rate in 2007, the last year before the recession and financial crisis. Undoubtedly, access to bank loans has become more restricted.
Across the whole EU the average success rate in obtaining bank loans has fallen. Within the EU, the success rate in 2010 was lower in the UK (and Northern Ireland) than in the majority of the original 15 EU countries.
In 2010, turning the comparison around to measure unsuccessful SME applications, the biggest deterioration amongst the main EU countries was experienced in Ireland, where 27% of applications were wholly unsuccessful. Amongst the original 15 member states, the closest to the Irish experience was in the Netherlands where 23% were unsuccessful, compared to 21% in the UK.
The experience in Britain and Northern Ireland, and the Republic of Ireland, has been more restrictive than in most other EU countries. In part the restrictive approach is a consequence of the international banking crisis which appears to have been more severe in the UK and Ireland than in Germany, Belgium and France
Whatever the explanation, the consequences are painful.
Not only did over 30% of SMEs in Northern Ireland not succeed in getting a full loan, compared to the pre-recession years, but the survey shows that micro-businesses (defined as those that employ less than 10 people) have been hit even harder. Successful loan applications for micro-businesses fell from 89% pre-recession to only 45% in 2010 - successful bid rates have virtually halved.
The reasons for reduced bank lending are disputed. Businesses interpret the situation as banks either being unwilling or unable to lend. Some of the banks suggest that the demand for loans has fallen although this is contradicted by the survey. A possibility is that the banks, in a recession, are assessing applications as being more risky and backed by inadequate internal business funds.
Ulster Bank says that it is strongly committed to providing funds to SMEs "where there is credit-worthy demand". Ulster Bank reports that its dedicated SME loan fund has accounted for over 80% of local lending through the Enterprise Finance Guarantee scheme.
The contrasting views are difficult to reconcile. The official survey showed that local businesses said, more strongly than in Great Britain, that the banks were not giving reasons for refusing a loan. The dispute does not deny that bank lending has fallen.
The forthcoming conference, sponsored by the British Bankers' Association on November 17, will offer a platform where the commitment of the banks to the Banking Taskforce recommendations can be tested.
This evidence on bank funding is timely to reinforce the actions of Government, through Invest NI, in setting up a special lending facility for businesses which need additional relatively small loans, possibly of up to £500,000.
The Invest NI initiative will create a special £50m lending fund with a £25m from the public sector and drawing on contributions of £25m from the commercial banks and the private sector. A parallel scheme has been started in Scotland.
In Northern Ireland, this proposal offers welcome support. The delay in its establishment has not been fully explained.
It may be that it will require legislation or Assembly approval.
However, there is much to commend urgent delivery of the agency which can make funds available.