A TOTAL OF 41% of loans to Small and Medium sized Enterprises are in arrears, when weighted by value, a new report from the Central Bank has revealed.
The default rate is 26 per cent when measured by the number of loans, the report found.
When it comes to defaulting on loans, the smallest and largest loans carry a higher default risk than those in the middle. Among the largest loans, SME default rate is 48 per cent.
In its SME Market Report out today, the Central Bank’s economists in the Financial Stability Division report on the developments in the Irish Small and Medium Enterprise (SME) credit market.
The default rate is highest for SMEs in the construction, hotels and restaurants and personal sectors, and is shown to increase among the largest 25 per cent of loans.
The sector receiving the most gross new lending over the period 2010 Q1 to 2013 Q4 has consistently been the primary sector, which includes agriculture, forestry and fishing, followed by the wholesale and retail trade sector.
With regard to credit demand, the application rate has remained stable between 35% and 40% at March 2013 to 35% at March 2014.
Credit demand is higher for small and medium firms than for micro firms.
Drop in recent years
Overall, the amount of credit available to SMEs has fallen since 2011, the latest figures from the Central Bank show.
They found that the outstanding balance of lending to SMEs has been steadily falling since 2011.
The report said this pattern can be seen among all the major sectors of the non-ﬁnancial, non-real-estate economy.
“Gross new lending ﬂows to these sectors have remained between €450 and €750 million per quarter since 2011 with no discernible upward trend,” said the Central Bank.
The report also found that SME credit demand has fallen slightly this year to March 2014, but is around the european average.
The demand for working capital and restructuring purposes is “outstripping” that for investment or growth purposes, said Central Bank.
When it comes to credit supply conditions, they eased in the period 2011-2014, with rejections of SME credit applications falling from 30 to 20 per cent between March 2011 and March 2014.
There was also a steady increase in the percentage of ﬁrms reporting that the size of loan available to them has increased.
Ireland and Europe
In a European context, Irish SME credit conditions remain closer to those of Greece, Italy, Spain and Portugal than to the countries with the most favourable conditions, found the report.
Notably, the amount of ‘discouraged borrowers’ (meaning: people not applying for credit because they expect that they will be refused) is signiﬁcantly higher in Ireland and Greece than elsewhere in Europe.
The most common bank lending requested is ‘renewal or restructuring of existing overdrafts’, with 44 per cent of all SMEs seeking credit from October 2013 – March 2014 requesting this.
There has been a gradual improvement in credit conditions over the three-year period. The rejection rate among those SMEs applying for credit and receiving a decision in the last six months fell from 30% in September 2011 to 20% in March 2014