SME Lending Up 4.8% Says Central Bank

/ 22nd July 2016 /

Gross new lending to SMEs in Q1 2016 was 4.8% higher than a year earlier and 38% higher than Q1 2014, according to the Central Bank’s SME market report for the six months to end-June.

The share of SMEs applying for bank credit has declined from 30% to 26% since the last report. While declines were observed for all size categories, they were particularly evident for Medium-sized SMEs, down from 34% to 21%.

The majority of credit applications were for working capital (39%), and this rate is similar across SME sizes. This was followed by new vehicles/equipment (28%) and growth/expansion (22%).

Rejection rates also show declines and are now in line with euro area averages, says the CBI. Across all SME sizes, the rejection rate declined from 15% in September 2015 to 11% in March 2016.

SME indebtedness is declining, the report shows. Across all SME sizes, the median debt-to-turnover ratio has declined from 5.5% in September 2015 to 4.5% in March 2016 (peak of 10% in March 2014). While medium firms had a significantly higher ratio in earlier survey waves, all firm sizes are now between 3.3% and 5%. The share of firms with no debt has increased from 23% in September 2013 to 37% in the latest survey.

Interest Rates

However, interest rates on non-financial corporation loans under €250,000 remain high relative to euro area averages. Just 26% of SME outstanding credit stock was in default at the end of 2015, down from 41% in 2013.

The three main banks continue to hold most of the lending market, at 95% of the total, and overall the stock of credit has continued to decline and is down 5.3% on the previous six months.

Compared to Q1 2015, annualised new lending in Q1 2016 has increased in the Construction (36%), Agriculture (7.7%) and Manufacturing (1.8%) sectors but declined in the Wholesale/Retail (-17%), Hotel/Restaurant (- 14%) and Services (-9.2%) sectors. The share of new lending is highest in the Agriculture and Wholesale/Retail sectors.

The report also reviews the activities of the Strategic Banking Corporation of Ireland, which funded credit amounting to 9% of the total borrowings by SMEs from March to December 2015.

Between March and December 2015, 4,619 SMEs drew down €172m in loans funded with SBCI (taxpayer) capital. SBCI lending is more investment focused, with just 9% of the loans used for working capital purposes compared to 39% for the SME market in general. In terms of regional spread, the SBCI shows similar shares relative to CBI loan-level data for this period, although SBCI funded loan activity is higher in the Mid-West and lower in the South-East.

By sector, SBCI-funded lending has lower shares in Services, similar shares in Agriculture and Construction, and higher shares in Manufacturing, Wholesale/Retail and Hotels/Restaurants.