SME access to credit remains resilient in the pandemic recovery

• SME turnover and profitability indicators continue to recover from pandemic lows.
• SME demand for credit remains relatively low, but should be considered in the context of extraordinary government supports and creditor forbearance.
• The tapering of government supports may result in a rise in credit demand over the coming months.

The Central Bank of Ireland has today (21 April 2022) published a Financial Stability Note, “SME credit conditions in the pandemic recovery”, authored by Elena Durante and Niall McGeever. The Note examines credit conditions for SMEs in the context of the recovery from the Covid-19 pandemic and the extraordinary policy measures put in place during the crisis. This research forms part of the Central Bank’s work to monitor SME trading performance, a key consideration in identifying and studying potential financial stability risks.

The overall picture is of a recovering SME sector broadly in line with firms elsewhere in the euro area. However, some sectors – such as Accommodation and Food – face a longer road to recovery. Future challenges may emerge due to ongoing inflationary pressures and, more particularly, the tapering of government supports, which have offset losses and provided considerable support to firms.

In terms of new lending, bank lending to SMEs has fallen to 2016 levels. Quarterly bank lending volumes have fallen by 13%, from approximately €900m to €780m. Once again, there is evidence of considerable variation by sector – Accommodation and Food has seen a decline of approximately 70% since 2019, and as of December 2021 had yet to rebound. This sector alone accounts for about 40% of the aggregate decline in new lending. Half of sectors, however, have seen modest or no declines, while manufacturing has seen a 10% increase in lending volumes.

Credit demand did not rise during the pandemic and actually fell further in mid-2021. Credit demand among Irish SMEs remains significantly below the median for the euro area. The Note indicates that the main reason Irish SMEs don’t apply for credit is because they have sufficient internal funds. 60% of Irish 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, 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. 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. Many otherwise unviable firms may have received cash support through policy schemes, but will ultimately fail. 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.

Notes to Editor

Financial Stability Notes – Full Series