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THE GOVERNMENT HAS taken the wraps off a new bank for small and medium enterprises (SMEs), with an initial budget of €500 million.
The announcement today was made with some fanfare, with the Taoiseach and Tainiste accompanied by Jobs minister Richard Bruton and Finance minister Michael Noonan.
News of the new bank has been floating around since the beginning of the week, but today’s announcement put meat on the bones of what we knew already.
What is it?
The SIBC is designed to plug a hole in the finances of many SMEs around the country. Small businesses in Ireland are crying out for funding, but they face a plethora of problems mean that they can’t get access to the funding that they need.
Problems? Such as?
Lobby groups representing the segment have long cried foul over the lending practices of banks to smaller businesses.
Most recently, ISME came to the Jobs committee with a list of complaints that included inexperienced bank staff, a fear of making decisions without getting sanctioned by higher bank officials, and unreasonable guarantees being sought for small sums.
The banks have also been charged with offering terms which make it impossible to draw down loans, and discouraging applications that have no chance of being accepted to keep their approval rates artificially high.
In response, bankers have said that many credit facilities for SMEs remain underused.
The pillar banks (AIB and Bank of Ireland) do have targets for lending into the SME sector, but some industry observers have leveled the charge that banks are “cherry-picking” the least risky loans.
Basically, the SME sector say that the banks can easily meet these targets while the sector remains drastically underfunded.
They can do this, it has been alleged, because Ireland is comparatively under-banked: that is, we don’t have enough banks. This means that the demand for finance is too big to be met by the banks that are lending, so they can choose the least-risky applications.
In addition to this, many business customers of smaller, foreign banks that are exiting the market are being confronted with the harsh reality that they may have no bank once that happens.
These businesses are also on the hunt for new homes, adding to the amount of demand for credit among the country’s SMEs.
And how much is the SBIC going to have to play with?
The initial budget for the bank is €500 million. While this is a good bit less than had been floated earlier this week, Finance Minister Michael Noonan said today that he hopes to up that total before the end of the year.
When can businesses expect to see some of this cash?
The next item on the agenda is getting the law supporting the SIBC passed through the Oireachtas. Noonan told reporters this morning that he hopes to get that done before the Dail rises for its summer break.
The next steps will become more clear once that happens, although the Finance minister said today that he wants the bank to be lending before the end of the year.
Where is this €500 million coming from?
Some of the cash will come from the former National Pension Reserve Fund, which has been reconstituted as the Irish Strategic Investment Fund.
More will come from the German government-backed bank KfW, which has lent extensively to the peripheral eurozone countries (the bailout pack. The PIIGS. Whatever they’re calling us now).
A third strand will come from the European Investment Bank funding, the bank has a mandate to push funds into European economy.
More investment could come from more of our continental neighbours, Noonan said this morning.
Other European countries have expressed an interest in putting small amounts of capital in in solidarity with Ireland.
When pushed, the Minister said that France was one country that was looking at sinking some cash into the Irish SME sector.
So where can we apply for this cash?
The bank, while it will be a lender, won’t have any front of house staff or branch network.
Existing high street banks will administer the fund, while the Government also seems to have indicated it will be available for other banks that might want to enter the Irish market.
What’s the verdict?
So far, reaction has been positive from lobby groups representing the sector. ISME welcomed the announcement, saying that it had been lobbying for the measure since the bank crash first happened in 2010.
However, Mark Fielding said that there needed to be safeguards put in place to make sure the funding got through to the smaller businesses that are most hard-pressed.
“The fear among credit-squeezed SMEs is that the bailed out banks will revert to form and divert these loan funds to ‘safer’ large businesses. Our banks have form in this area and previous European low-interest loans found their way to less risky larger business, making a killing for banks while starving SMEs of much needed finance.”
The Small Firms Assocation joined ISME in welcoming the new deal, but warned that “the €500 million of funds being made available is a tiny fraction of the current €27 billion business banking market. Much more ambition is required.”
What else should we be watching out for?
The new funding package will be a welcome addition to financing options for banks. However, many in the sector will want to make sure that the totality of the funding goes towards new lending.
Previous targets set out by the government in relation to lending to the sector have often been met by restructuring existing loans or rescheduling repayments, sources in the SME community said. For the maximum impact of this to be felt, it needs to go into the coffers of small businesses around the country.
Finally, the new funds do not erase the problems facing the SME sector when it comes to finance and banking.
Many are still being left without a bank by the exit of foreign players, and as the SFA has pointed out, there is much more than €500 million worth of demand in the marketplace.
Also, the new supply of credit will do little for the cadre of very indebted businesses that are struggling to stay afloat.
Are you a small business owner? Let us know what you think of the new bank in the comments.