SMEs continue to avoid bank loans amid recovery

New bank lending to small and medium-sized enterprises (SMEs) recovered slightly in the second quarter, but overall credit fell as business owners paid off debt at a faster pace, new Central Bank figures show. .

Banks granted 1.1 billion euros in gross new loans to SMEs in the three months to the end of June, an increase of 42 million euros – or 4.1% – compared to the first quarter and a 49% growth in the second quarter of 2020, when Covid-19 crippled the economy.

However, net lending fell by 107 million euros in the quarter as the post-Celtic Tiger deleveraging trend continued despite promises to ease pandemic restrictions.

Outstanding SME credit on the balance sheets of Irish banks fell to €19.3 billion, its lowest level since the Central Bank began compiling data more than a decade ago.

The Central Bank said that amount was likely higher than it would have been due to pandemic payment disruptions.

About a third of this total was for home loans, while the rest was for ‘basic’ SME credit for business purposes.

Construction and real estate saw some of the biggest increases in gross lending in the quarter as builders returned to building sites ahead of a wider reopening of retail and hospitality.

However, service-based sectors such as hotels and restaurants have been slower to recover, with lending to hospitality businesses remaining well below pre-pandemic levels.

Average interest rates paid by SMEs started to climb in the second quarter.

Rates on new loans rise 9 basis points to 3.84% in Q2. This helped lift the weighted average of outstanding loans to 3.54%, but it was still 12 basis points lower than the previous year.

Like mortgages, the interest rates paid by Irish businesses on bank loans are well above European averages.

Outstanding bank loans across all private sector businesses, including large corporations, were also at an all-time low in the second quarter.

On the other side of the balance sheet, businesses are teeming with cash, with deposits far outpacing new loans in the second quarter.

Private companies hid an additional 4.5 billion euros in the quarter, mirroring a trend seen in households during the pandemic. New deposits for the year to the end of June reached 19.9 billion euros, bringing total business deposits to 71.9 billion euros.

Darcy J. Skinner