Bank lending to SMEs has fallen to 2016 levels, according to the latest research from the Central Bank.
Quarterly bank lending volumes have fallen by 13%, from c.€900m to €780m, though there is considerable variation by sector.
Accommodation and Food has seen a decline of c.70% since 2019, and as of December 2021 had yet to rebound. This sector accounts for about 40% of the aggregate decline in new lending.
However, half of sectors monitored have seen modest or no declines, while manufacturing has seen a 10% increase in lending volumes.
The data is disclosed in a Financial Stability Note, ‘SME credit conditions in the pandemic recovery’, authored by Elena Durante and Niall McGeever.
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The overall picture is of a recovering SME sector broadly in line with firms elsewhere in the euro area. However, Accommodation and Food face a longer road to recovery.
The CBI duo note that credit demand did not rise during the pandemic and actually fell further in mid-2021.
According to the economists: “Credit demand among Irish SMEs remains significantly below the median for the euro area. The main reason Irish SMEs don’t apply for credit is because they have sufficient internal funds.
“60% of SMEs that did not borrow recently have indicated that they already have sufficient internal funds for their needs, up on 50% pre-pandemic.”
In terms of credit supply, the Note records that rejection rates on SME loan applications remain stable. Micro-enterprises generally have higher rejection rates, with the present rate similar to that observed in 2016/17.
The research found that in a European context, rejection rates did not rise significantly during the pandemic in the majority of euro area countries.
Banks tightened lending standards during the acute phases of the pandemic, but were no longer doing so in late 2021. Overall, evidence suggests a modest tightening in credit conditions during the pandemic.
Setting these findings in a policy context, the Note emphasises that credit market outcomes must be weighed against the significant policy supports provided during the Covid-19 crisis.
The Employment Wage Subsidy Scheme (EWSS) was by far the scheme most widely availed of by SMEs, while around €3.1bn in tax was deferred under an extensive tax deferral programme.
In this regard, and considering the longer term outlook, the tapering of government supports and particularly the EWSS may lead to difficulties for a cohort of weaker firms, the Central Bank economists believe.
“Many otherwise unviable firms may have received cash support through policy schemes, but will ultimately fail,” the report states. “Credit demand may rise in the coming months as viable and unviable firms alike seek refinancing from the formal credit market.”
The Note also identifies inflationary pressures as an important consideration. These pressures could swell input costs for SMEs, depress demand, and raise the possibility of higher debt servicing costs.
