New lending to SMEs declined by one-fifth in 2020 compared with the year before, according to a Central Bank of Ireland report published this week.

The CBI’s SME Market Report for 2021 also noted that SME credit applications were down slightly year-on-year in 2020 (18% vs 20% in 2019), possibly due to the availability of public supports through the Covid-19 pandemic.

SMEs were borrowing for working capital needs (59%) over investment, while those that did not apply for credit said that they had sufficient funds in seven out of ten cases.

The CBI report found that the share of undrawn credit balances available to SMEs is small in some of the most affected sectors, i.e. 3.6% in December 2020 for accommodation and food.

Banks reported tightening credit standards for SMEs in Ireland in 2020 but loosening of standards for guaranteed lending upon the introduction of the Credit Guarantee Scheme in the second half of 2020. This tightening was not driven by factors relating to bank balance sheets, but mainly by the general economic deterioration and specific factors for individual firms.

In Association with

Expired payment breaks on Republic of Ireland SME loans have mainly returned to full payment on extended (47%) or existing terms (33%), one in five requiring further support or entering arrears.

Almost two-thirds of SMEs in Ireland had declining turnover on net, and while SMEs have adjusted to this via reduced expenditure and the use of state supports, turnover declines have only partially been offset, with firms making losses on average in 2020. Further losses are expected to accumulate until the pandemic recedes, the CBI report warns.

Deputy governor Sharon Donnery said that while credit to SMEs was down overall in 2020, the reduction reflected both reduced demand from SMEs in 2020 and some tightening in supply conditions. “This tightening of credit conditions was much smaller than in the financial crisis, and was driven by general economy and firm specific factors as opposed to bank balance sheet constraints as in 2008.

“Monetary, macro- and micro-prudential policies have complemented each other so that the financial system has worked to absorb rather than amplify the shock, to maintain the flow of credit to the economy. The government guaranteed lending appeared to have eased credit conditions for SMEs.”

Separately, the Central Bank also published a research technical paper this week that was written by Fergal McCann and Fang Yao. The paper develops a microsimulation model that can identify SMEs as financially distressed due to their inability to meet short term losses with cash (liquidity distress) or to meet their debt repayments (solvency distress).

The paper estimates that around one-in-six Irish SMEs may have been financially distressed at the end of 2020, or 14% when weighted by debt balances.