​Central Bank examines credit conditions for Irish households and SMEs

• The contraction in new lending volumes during the pandemic was largely driven by a fall in demand rather than a contraction in supply through tighter credit standards.
• Some forward-looking risks to credit supply remain, including the possibility of higher than anticipated deterioration in credit quality on lender balance sheets.
• Non-bank lenders provided €3.7bn in new loan agreements to Irish SMEs between 2019 and 2020. Lending to real estate SMEs had the largest share at €1.8bn.

Today (29 April 2021) the Central Bank of Ireland published an Economic Letter entitled ‘Credit Conditions for Irish Households and SMEs’, written by Jane Kelly, Rory McElligott, Conor Parle and Martina Sherman. The Letter examines the impact of Covid-19 on the Irish credit market, and discusses policy interventions designed to support the supply of credit during the pandemic and as the economy re-opens.

The onset of the Covid-19 pandemic saw an initial, material, contraction in new lending volumes. While activity has started to recover, notably in the mortgage market, consumer lending remains subdued and is unlikely to recover before consumer spending. SME lending began to recover in late 2020, though trends vary across sectors.

The contraction in lending volumes has been driven by a drop in demand due to the contraction in economic activity, rather than a tightening in credit conditions. Survey data suggests firms’ aversion to take on credit include factors such as sufficient internal funds, low economic sentiment and scarring from the last crisis. Nonetheless, demand for credit may increase quickly as the economy re-opens and fiscal supports are unwound. While a tightening of credit standards has been reported throughout 2020, this was at a slower rate than during the financial crisis.

Previously accumulated resilience and significant policy supports during the pandemic have enabled the financial system to absorb rather than amplify the economic shock of Covid-19. Despite significant policy actions having been taken, if a tightening of risk appetite by lenders were to crystallise, the provision of financing by the financial system may only partially meet demand from households and firms as the economy starts to recover. Firms without lender relationships may be particularly vulnerable in such a scenario.

Today, the Central Bank also published the latest entry in the Behind the Data series, entitled ‘The role of non-bank lenders in financing Irish SMEs’, written by Tiernan Heffernan, Barra McCarthy, Rory McElligott and Conall Scollard. The BTD notes non-bank lenders play a key role in funding SMEs in Ireland, providing €1.6bn in new loan agreements to Irish SMEs in 2020, down from €2.1bn in 2019. In comparison, the Central Bank data show that banks provided €4.1bn and €5.4bn in drawn-down new lending in 2020 and 2019 respectively.

The BTD reports that non-bank lenders tend to specialise in specific sectors or product lines (e.g. leasing), which means the importance of non-banks for each economic sector varies significantly.  Lending to real estate SMEs had the largest share at €1.8bn between 2019 and 2020.

The Economic Letter series and the Behind the Data series are available on the Central Bank website.