Annual new SME lending in 2020 declined by 20% compared to 2019 - SME Market Report

• SME credit demand was lower than the previous year, with firms reporting sufficient funds and aversion to debt
• The rate of rejection for SME credit applications, at 15%, was mostly unchanged to previous years, but rejections for part of the requested amount increased
• Payment breaks were widely used for Republic of Ireland SME lending through 2020, with around a quarter of debt balances at end of January 2021 having availed of this support

The Central Bank of Ireland has today published its SME Market Report for 2021. The Report aims to provide a timely overview of developments in the provision of credit to Irish Small and Medium Enterprises (SMEs) by financial intermediaries, including the challenges posed by COVID-19.

The Report finds that:

• SME credit applications were slightly lower than the previous year over the period March to October 2020 (18% vs 20% in 2019) even as applications increased elsewhere in the euro area.
• SMEs reported they did not apply for credit noting they mainly had sufficient funds (72%) – in common with other euro area countries – but some report dislike of debt. Applications for credit by Irish SMEs may have been lower given the availability of public supports.
• SMEs were borrowing for working capital needs (59%) over investment – especially since the pandemic – and this is broadly similar to the euro area.
• 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 & 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 2020 H2. 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.
• Expired payment breaks on Republic of Ireland SME loans have mainly returned to full payment on extended (47%) or existing terms (33%) with 20% requiring further support or entering arrears.
• Almost two thirds (62%) 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.

Referring to the Report, Deputy Governor Sharon Donnery said “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”. Ms Donnery added that “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 and how the Government guaranteed lending appeared to have eased credit conditions for SMEs.”

Notes

Today the Central Bank also published a Research Technical Paper (RTP) written by Fergal McCann and Fang Yao entitled “Simulating business failures through the liquidity and solvency channels: a framework with applications to COVID-19”. The RTP 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 RTP estimates that – on these metrics – around one-in-six Irish SMEs may have been financially distressed at the end of 2020, or 14% when weighted by debt balances.