Central Bank study sparks call on SME loans
Neil McDonnell, chief executive at business group Isme, said that, with Irish SMEs facing the fallout of Brexit, the pressure of expensive credit was “making a bad situation worse”.
Surveys have consistently shown the rates paid by Irish SMEs for their loans were the highest in the eurozone. They are higher than those paid by Italian SMEs which have weaker banks than here.
The in-depth Central Bank study by Sarah Holton and Fergal McCann, which was published yesterday, looked at the reasons SMEs across the eurozone were paying a premium for their loans. It showed the dominance of banks and their balance sheet weaknesses were among the reasons lenders levy bigger borrowing costs on small firms compared with their larger rivals.
The premium SMEs face in their loans “is a particularly relevant concern for monetary policy given that smaller firms tend to rely on bank finance and have fewer external financing choices compared to larger firms”, it said.
“Smaller, bank-dependent borrowers are charged relatively higher interest rates during a period of bank funding difficulties, as they have lower bargaining power as a result of their limited alternative financing options,” researchers found.
“We find that banks with a greater market share charge a higher SFFP [a small firm financing premium], and that the effect is particularly strong in times of real economy stress.
"Secondly, we find that banks with impaired balance sheets, as captured by non-performing loans, also have a higher SFFP and the effect increases in times of high unemployment. We also show that banks with a more stable funding base charge a lower SFFP and that it can act to mitigate the effects of macroeconomic stress.
“Finally, we find that in countries experiencing sovereign stress, high domestic bond holdings lead to higher SFFP, but the effect is reversed in the absence of sovereign stress.
“Bank balance sheet strength is particularly important for access to finance for small firms. This is not only because loans constitute a relatively higher share of their external financing, but also because banks can extract greater revenue from these dependent borrowers.
“Our results show that banks with characteristics that capture impaired funding and capital positions indeed charge smaller firms disproportionately higher interest rates. This underscores the importance of having a strong and resilient banking sector.”
Mr McDonnell at Isme said its own surveys consistently showed that accessing credit was a major bugbear for small firms, and that the costs of their loans were more expensive than in similar countries.
SMEs are forced to access specialist non-bank lenders who have larger costs, he said.
Leading economist Jim Power said it was important to develop non-banking sources because Irish SMEs faced among the highest costs of bank financing in the eurozone.
He said that the differences between rates charged across the eurozone were because there was no real pan-European banking policy and banking union.
