Joint Committee on Agriculture, Food and the Marine debate -
Tuesday, 2 May 2017

Agriculture Cashflow Support Loan Scheme: Strategic Banking Corporation of Ireland

Chairman

Before we begin, I remind members and witnesses to ensure their mobile phones are turned off for the duration of the meeting.

From the Strategic Banking Corporation of Ireland, SBCI, I welcome Mr. Nick Ashmore, chief executive, and Ms Suzanne Sweeney, head of lending. I thank them for coming before the committee to update it on the agriculture cashflow support loan scheme, which was introduced in January of this year.

Witnesses are protected by absolute privilege in respect of the evidence they are to give to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I ask Mr. Ashmore to make his opening statement and we will then take questions from members.

Mr. Nick Ashmore

I thank the Chairman and members of the committee for inviting us today. We welcome the opportunity to talk to the committee about the agriculture cashflow support loan scheme and to take any questions members have on this or, indeed, any aspect of the SBCI’s work in the food and agriculture sector. Joining me today is my colleague, Ms Suzanne Sweeney, head of lending at the SBCI.

To introduce ourselves, the SBCI is Ireland’s new promotional finance institution. Between March 2015 and December 2016 and working with eight front-line lending institutions, we have supported over 12,500 SMEs with over €540 million in low-cost loans and other forms of finance, using our supply of long-term, low-cost liquidity. This includes significant involvement in the agriculture and food sector. Farming has been the largest sector using this form of SBCI finance, representing 23% of total take-up to date, with more than 5,000 farm businesses having drawn down €141 million in lower-cost SBCI loans up to the end of December 2016. This is in addition to the €150 million that has been made available through the agriculture cashflow support loan scheme.

We first became involved in the agriculture cashflow support loan initiative in July last year, when we engaged with the Department of Agriculture, Food and the Marine on the Minister’s priority to address the impacts of changes in the sterling exchange rate and lower commodity prices on the farming sector, impacts that included very significant cash flow challenges for many farmers. This engagement accelerated with the news of the exceptional aid made available by the European Commission. This was confirmed in September 2016 in Commission Delegated Regulation 2016/1613, providing for exceptional adjustment aid to milk producers and farmers in other livestock sectors. The Department carried out a sector analysis which provided a vital insight into those cash flow challenges. The main findings were that farmers would face a shortage of cash towards the end of the year and into 2017 as a consequence of lower selling prices and-or crop yields, and that they were heavily exposed to costly trade credit and overdrafts to bridge cash flow requirements.

We also engaged with the banks, which confirmed their interest in working with farmers in terms of converting costly trade credit and other capital expenditure borrowings into more sustainable term loans. However, the challenge in tapping into that appetite was to create a more flexible and competitively priced product than what was available in the market at the time and, critically, to address the "red tape" that farmers regularly face when applying for loans. Given the outlook on prices, it was also important that the new product would be available during early 2017.

We had three overriding objectives when we sat down with the Department to the devise the scheme: to develop a product that responded to the liquidity problem that farmers were facing; to do so in a manner that achieved sufficient impact for farmers; and to do so in a way that achieved the greatest possible economic value-add within the parameters we were working in. Alongside the Department, we developed what became the agriculture cashflow support loan scheme by leveraging the €25 million available to us from the Department, which included €11 million from of exceptional aid from the European Commission, alongside the SBCI balance sheet to create a €150 million lending scheme.

While the banks provided the additional cash from their own balance sheets, without which we would not have been able to maximise the impact of the scheme, the SBCI, along with the European Investment Fund’s COSME programme, jointly provided the guarantee required to underpin the flexibility of the loans and their lower cost. Using the funding provided by the Department and its own balance sheet, the SBCI is providing an interest subsidy and a partial guarantee on the loans. The interest rate is 2.95%, which is fixed for the life of the loan. This compares with rates of between 6% and 14% for alternative products such as overdrafts, standard variable loans and merchant credit. Loans up to a maximum of €150,000 per farm are available with terms of one to six years and optional interest-only repayment periods. The loans are unsecured, which has the added advantage of allowing farmers greater flexibility to engage with banks other than their main lender. The loans can be used for future working capital requirements, for example, for feed, fertiliser, trading stock or tax. They can be used as an alternative to more expensive trade credit, to replenish working capital already used on the farm to support capital expenditure and to refinance existing farm creditors. The loans are available to all livestock farmers, tillage farmers, horticulture producers and others involved in primary agricultural production.

The involvement of three major banks with nationwide reach has been a critical factor in the success of the scheme. At a most obvious level, the banks have made significant funding available from their own balance sheets. There is also the fact that most farmers have an existing relationship with one or other of the participating banks, which has greatly facilitated the loan application process. Because of their nationwide spread the banks have played an important role in promoting awareness of the loans through their respective branch networks.

The significance of the scheme is worth reflecting on for a moment, particularly as a precedent for future use of risk sharing and other financial instruments as a means to deliver new policy measures in this space. This is a ground-breaking policy measure in the Irish market and the first use of the COSME programme, which is also part of the Juncker plan or the European Fund for Strategic Investments. Crucially for the SBCI, it represents the first time that the corporation itself has taken on risk sharing with front-line lenders - in this case, AIB, Bank of Ireland and Ulster Bank. This complements the SBCI’s role as operator and manager of the credit guarantee scheme on behalf of the Minister for Jobs, Enterprise and Innovation.

The SBCI will continue to source other European supports and funding to facilitate the delivery of new policy measures in the future as market failures are identified. By building a central conduit for the market for risk sharing and other financial instruments, we can also ensure the efficient flow of European SME supports to the Irish market.

I will now turn to deployment under the scheme. Based on loans that have been drawn down by farmers, to date €60.2 million has been advanced. The average loan size is €32,000. The banks advise that all of the remaining €150 million is committed and is in the process of being drawn down. Based on progress to date, we anticipate that circa 4,000 farmers will benefit from the scheme. In the supporting documentation that we submitted in advance of today’s hearing we have provided a breakdown of the loans drawdown to date by loan term, sector and region. This picture will continue to evolve as the data are reported to us by the banks. As members will see, however, the loans are broadly spread in geographical location and by farm sector.

I refer the committee to slides ten, 11 and 12 at the end of the presentation provided and will briefly talk through the main information on these slides. Slide ten shows the summary of loan deployment to 28 April 2017 broken down by the term of the loans. Loans of more than four years' duration are currently 54% of loans at €32.4 million, which is 41,551 loans. It is worth noting that the average size of a loan is larger at the longer end and smaller at the shorter end. Looking at slide 11 where the sectors are split, we can see that the dairy and beef sectors are by far the largest users of this form of funding. The dairy sector draws down an average loan of almost €37,000. The average beef sector loan is slightly smaller at about €27,500. It is significant that in the other sectors tillage is substantial at 8%, with 90 loans going out there. Slide 12 illustrates the regional split and shows the regional spread to be healthy with loans not concentrated too much in one area. The region with the largest proportion of loans is the south west with 22% and this also reflects our experience on the agricultural investment loans scheme where the south west has the largest share of the borrowing. This would be for investment purposes as well as for working capital.

That concludes my opening remarks and I am very happy to take any questions from members.

Deputy Jackie Cahill

I thank Mr. Ashmore for his presentation. We had an argument at this committee a couple of weeks ago about the term of the loan and how it would affect the subsidy that was put in to the scheme. Part of Mr. Ashmore's presentation around the agriculture cashflow support loan scheme states "An interest subsidy of 2% is paid to the banks each quarter on the outstanding balance of the loans, which is paid in arrears." We got stuck into this with the Minister when he was at the committee a few weeks ago. We could not get our heads around whether there was a predetermined split to the terms of the loan to ensure the subsidy equated to the amount that was available from the EU to subsidise the scheme. The vast majority of farmers who looked for this loan were looking for as long a term as possible. In my experience of farmers who applied for the loan, there was a concerted effort on the part of the banks to reduce the term of the loan. We can see from the information presented by Mr. Ashmore that 54% of the loans given out so far are for terms of under four years. This is key to the issues we had when the Minister was here and I would like to hear some elaboration on that. There is a subsidy paid each quarter to the participating banks. Were criteria laid down at the start to say that X amount of loans had to be over certain periods or was each case judged on its merits?

I am extremely disappointed at the numbers of pig farmers and horticulture growers who have used the scheme. Only seven pig farmers to date and six horticulture growers have participated. Both of these sectors have been under severe financial strain. In the future hopefully we would get a similar scheme to this one. If we do, we must examine the criteria because I very much doubt that farmers in these sectors did not try to get this money because both sectors are very heavily indebted. The criteria would have disqualified them. Much of that sector's debt would probably have been aged debt and they would not have been able to qualify. Those figures are disturbing. The amount of qualifying participants from both of those sectors is in single figures. Half of the money has been given out at this stage. Given the way in which the scheme closed up so fast, I would have thought that by the end of April, more of the money would have reached farmers' accounts. Is there a reason for the delay or is it purely administrative?

Do the witnesses have an indication as to further demand? The demand was strong and the appetite out there for the scheme was immense. The scheme was closed in a matter of weeks after being opened and €150 million was committed. Is there a handle on what would have been the demand or requests for capital under this scheme if the scheme was still open and being applied for? Is that figure available?

Senator Paul Daly

I will be brief because Deputy Cahill has covered most of the issues I wanted to tease out. The entire fund is vouched for at this stage, but why has such a small percentage transferred into farm bank accounts? My key question, which Deputy Cahill has also asked, is how many people were refused? The scheme operated on a first-come first-served basis but how far could it have gone? Such information could give us a better indication of the extant financial woes. Many people sought to be included in the scheme and unfortunately there was not enough funding to facilitate them. Does Mr. Ashmore have any indication of those figures?

Mr. Nick Ashmore

Coming to the first question around the term of the loan and how it affects the subsidy, to be clear, the €25 million funding provided resides with the SBCI and is only paid out to the banks as it is required. They have to prove that they have loans in place that we are covering to justify the receipt of the subsidy. It is scaled to make sure that it reflects the actual loan portfolio and there is no risk of any further funds going to the banks than are absolutely necessary. It is the same if they claim under the guarantee. They have to try first to restructure the loans but we will they pay out for loans that go into default.

There was no predetermined split whereby we were telling them they had to do so many loans of this or that duration. It was really demand dependent, matching the loan term to the use of the funding. The larger loans have a longer duration and equate often to the refinancing of capital expenditure that the farmers have already made. They have used their own cash, their own working capital to buy a tractor or invest in a new facility, and those loans are refinanced out at the cheaper rate to restore their working capital position and inject liquidity back into the business. They tend to be larger loans. The shorter-term loans tend to be refinancing working capital, merchant credit, other creditors and that type of thing, and therefore there is a shorter duration applied, in keeping with the normalised lending approach. Those loans are delivered by the banks, subject to their normal lending criteria and procedures.

What we have achieved with the guarantee is to remove the need for security. While we have added a little bit of bureaucracy with the paperwork on those loans, to meet the information requirements of the Department and the Commission, the fact that there is no need then to append the loans to security over land or other assets is actually a major saving in terms of paperwork and time.

Deputy Jackie Cahill

Could I have a bit of clarification from Mr. Ashmore please? I am sorry for harping on the issue. On the €25 million that was available in subsidy, would I be correct in saying that if 80% to 85% of the loans were over a six year period, the demand on the subsidy would be greater? How was the SBCI able to do its sums, or has it done its sums? Is Mr. Ashmore confident that the €25 million subsidy will cater for the duration of this scheme?

Mr. Nick Ashmore

This is the first time something like this has been done in the Irish context, besides being a new institution. We have to be prudent in underpinning a scheme like this. We could not necessarily make an assumption around the mix of lending and duration within the portfolio. We had to err on the side of caution and we have put aside enough loss reserves to cover full payment of the guarantee under the scheme but also covering the full potential degree of subsidy. Should we find out in due course that the loan book is different from that original prudent assumption, that turn of events may release some cash back to the Exchequer. That funding will go back to the Department of Agriculture, either to go back into the pot or to be available for recycling into a future scheme. Whatever happens, the funding will not go to the banks unless it is absolutely required.

We could not predict going in and still cannot predict at this stage what the mix and duration of the loans will be and what exactly the loan book will look like. We are finding that as time goes on the duration is getting longer, because the longer loans are larger and they take longer to process. The smaller loans are put out more quickly. We are seeing that evolution.

It is a question of trying to balance the mix to make sure we are well covered and can absolutely fulfil the obligations placed on the SBCI in providing this guarantee. Sourcing the European funding from COSME has been a critical piece of that. We are one of the few institutions anywhere in Europe that has been able to apply the COSME programme to the agricultural sector, which is a major step forward and innovation.

In terms of the pig sector and the horticulture sector, it is notable that these loans are larger on average and as we said, the larger loans are taking longer to come through the system. It may well be that we will see more of those sectors coming through later in the drawdowns. As and when we have more data, we will provide a further update, probably monthly from here on out. The banks tend to provide us with the data in batches rather than in real time. We can provide an update in due course. Were there any further questions?

Chairman

What did qualify?

Mr. Nick Ashmore

We ask the banks to screen for qualifying criteria. Of all the loans that were presented to the SBCI through the IT system we built with the banks, we did not turn any down for failing the criteria. Trying to track loan applications, formal or informal, at the actual bank branch level or over the phone is very tricky. It is one of the really difficult areas to try to capture that last piece of information. When we structure these schemes, we try to gather absolutely the essential information to deliver the policy measure. Unfortunately, the more information we ask for, the less likely the banks are to work with us and process the loans efficiently. It becomes very bureaucratic and complicated. We do not capture quite the degree of interaction information that the banks have and that we might ultimately like to have. We have really focused on making sure that the loans that are there are qualifying, and are going to the right farmers under the right terms and conditions. That is where we focus our information gathering and our work.

Coming to the question of how far the scheme could have gone, we do not have that information. We can go back and make a further query with the banks to ask them if they have an idea. Ultimately, they did say to farmers at a point in time that they were done. There may have been other applications that could have come after that, but we simply would never know about them. Unfortunately, it is a very difficult question. It would be a great question to be able to answer to feed into further policy measures or actions.

Chairman

We have the banks in next week. It is obviously a question we can ask them.

Mr. Nick Ashmore

Yes. It may be something that we can answer with a survey in due course. We have to be very careful about data protection but we could do a randomised survey of farmers.

Deputy Jackie Cahill

Was the SBCI surprised at the rapid uptake of the scheme?

Mr. Nick Ashmore

Yes. We knew we needed a reasonably rapid uptake because we have a time limit. We have to be done and dusted by the end of August to meet the state aid window. We were a little bit concerned that we might end up having to drive the marketing and information. We had the same experience when we started the SBCI. The agriculture community is incredibly financially savvy and interest rate sensitive. They are the first to spot a good deal that helps them and they just went for it. It did catch us by surprise, I have to say, and I think it caught the banks a little bit by surprise as well. It was very well flagged. We worked very hard to talk to the Irish Farmers Association, IFA, the Irish Creamery Milk Suppliers Association, ICMSA, the Irish Cattle and Sheep Farmers Association, ICSA. We made sure we engaged with those stakeholders as much as we could so they were able then to inform their members. We were also helped by the media and Agriland, which got the word out very well.

Senator Tim Lombard

I apologise for being late. I was detained at another meeting. I welcome the witnesses to this space. It is a very important initiative and it has been very positive. I wish to ask about the duration of the loans. It is becoming an issue with the farming public. In the documentation, 19% of farmers are looking for loans over six years. Was that predetermined by the banks which put together the applications or did the farmers look for the loans to come in at six years? What I am finding is that the farmers who looked at the scheme and were very welcoming of it thought that the first two years should be interest free and the next four years would pay off the principal. When they went to the banks, they got a very cold response and that is why we only have 19% of them qualifying for the six years. What information does Mr. Ashmore have about those issues? Was he just given a fait accompli with the application form or did he have interaction with farmers on the ground? I do not know too many farmers who would be looking to pay off a complete loan in under one year. Most try to spread their liabilities over a period of time and the six year term was money that they thought they would never get so cheaply.

They looked for it but they did not get it.

Is Mr. Ashmore confident that the entire sum will be drawn down? It might be allocated but will it be drawn down by the institutions? I have heard stories of farmers being given approval for these loans but then being told they have to clear their stocking loans, which they have had for many years. They say they will not go near this scheme because they want to retain their stocking loans going forward. Has he information regarding the terms and conditions the banks are applying to these loans in order that farmers can qualify for the loans? The worry is that if some aspects of the terms and conditions are unattainable, the loans cannot be drawn down where the farmers are approved for them, which is a serious issue for the community. Has an audit of the terms and conditions been conducted by the SBCI to ascertain if they are outside the criteria?

Mr. Ashmore referred to security in his presentation. Have the banks looked for security in these cases? Will the SBCI seek an audit to ensure that no security was sought?

Mr. Ashmore hopes the drawdown of funds will be completed by August. If not, the money will be returned to the Department or go back into a black hole. Does he expect the money to be fully drawn down? If not, how much does he expect the shortfall to be? Will it be 10% or 5% of the overall amount? It is amazing to be able to access money at an interest rate of 2.95%.

I am not critical in case Mr. Ashmore thinks that. This is one of the most unique schemes that has been introduced for the agricultural community. Given the interest in it, the scheme was closed to applications in under 20 days by the three major banks. That shows how unique it is. This needs to be examined, however, because there is an appetite for money that is made available like this. As policymakers, it is one of the key drivers we need to examine. However, farmers feel short changed by the six-year limit.

Senator Michelle Mulherin

I thank Mr. Ashmore for his presentation. I very much welcome the scheme and farmers are benefiting from it. The way the opportunity was grabbed by so many so quickly, while welcome, is also a reminder of the untenable rates being offers by banks for term loans and overdrafts, which farmers and businesses in general have to contend with as they try to keep their operations going. My questions relates to how the scheme is operated by the banks. What interest rates do financial institutions charge for similar products? Does the fact that the banks are in receipt of a 2% subsidy per quarter mean they are effectively generating an interest rate of 4.95% on this money? Compared to their normal operating practice where they draw down money and they pay something back on the strength of that, I presume they are paying the State nothing for this money and are just facilitating the process. Is the State or some European institution getting a cut of this or are the banks just facilitating it?

With regard to terms and conditions, I gather from what Mr. Ashmore said that nobody is being asked to offer security in respect of these loans. I presume this because they are 80% guaranteed by the State. Will he confirm that this is correct? The entire amount was committed within 20 days of the money being offered but, for non-securitised lending, it seems to be taking a long time for it to be released to borrowers.

I was trying to follow the information the SBCI is getting from the banks. Mr. Ashmore said certain information is not captured regarding how many more people might have availed of this if they could have and, therefore, we should try to assess how many farmers were not in a position to avail of the scheme and are now paying the full whack in commercial interest rates. How much are the banks charging on average for a similar product?

He said it creates further complications with the banks to ask them more questions and to glean more information. They are getting a good deal on this in respect of what is being guaranteed and they are still applying the criteria for sound lending while 80% of the funds are guaranteed. They are, therefore, only taking on 20% of the risk. They should be fully co-operative with the SBCI, as an agency of the State, regarding information it might seek about this novel product.

The SBCI was established to provide funding to SMEs and to address the problems persisting with the banks. It would not be in existence if there were not problems with the banks. The SBCI provides low cost funding to financial institutions, which they pass on to SMEs, according to its website. Banks are accessing cheap money currently on the markets and our problem is they are not passing it on yet when the SBCI can access money, they will pass it on subject to terms and conditions. Other than to get us through a difficult period, how can the agency's activities bring pressure to bear on the banks to reduce their interest rates or will they just simply benefit from a scheme the State has set up in response to a difficulty that farmers and small businesses face to which they are not responding?

It is also stipulated that the SBCI provides "market access for new entrants to the SME lending market creating real competition". How does it assess its ability to create competition given there does not seem to be any competition? The banks are doling out this money on behalf of the SBCI but they are still not reducing interest rates. To what extent are new borrowers being facilitated under this scheme as opposed to existing borrowers? How does that tie in with the agency's founding objectives to help farmers and SMEs? Mr. Ashmore might have gathered that I am sceptical about the banks in general based on their track record and the way they operate currently, particularly in view of the fact that they have access to cheap money but will not pass it on.

Deputy Martin Kenny

Mr. Ashmore is most welcome. It is stated: "The normal lending assessment criteria will apply". A number of applicants with whom I have spoken found it as difficult to access this facility as when they sought other loans in the past when they had to jump through all sorts of hoops. The exception relates to the requirement for security. Most people who have had relationships with the banks will probably have letters of guarantee and security lodged with them for other stuff they are doing. It is, therefore, difficult to ascertain the benefit of that in general.

Certainly the issue is there may be a lot of people who looked at this, backed away and decided it is not for them and is not going to work because if normal lending criteria apply, the banks are setting a very high bar at present and if they are unable to get a normal loan, they will be unable to get this one either. That is one issue I have come across with many people.

The next point is similar to the point raised by Senator Mulherin regarding the SBCI's core business. Is the SBCI doing a lot of work with the agrifood sector and small businesses? There are many people involved in the small agrifood industry such as artisan producers developing small products who are starved of capital and who cannot get off the ground because they find it so difficult to get the banks to deal with them. In respect of the SBCI's small businesses, big plans programme, is the SBCI doing much work with them? Are there opportunities to find more space for funding for that sector?

Mr. Nick Ashmore

I will try to work my way through the points raised. In respect of Senator Lombard's question about duration, we talked about duration earlier. This was really determined by the demand and the use of the funding. The loans are available from one to six years. The duration is determined by what farmers applied for and what they were using the loans for. If those loans were for things like lower-cost stocking finance or working capital, they tended to be of shorter duration because it is about trying to apply the right loan solution to the right use. If it was refinancing a tractor that had been purchased or a piece of equipment, it tended to be of longer duration because it was to finance the purchase of a larger asset. What one sees with the size of the loans is that those loans of longer duration tend to be larger loans as well. We do not have a predetermined expectation of what that mix would be so we wanted to allow for those situations. It concerned the juxtaposition between the banks' normal lending criteria and the normal way they apply loans to farmers. I think there might be a mismatch of expectations given that the scheme was explained in simple terms. With loans of up to six years, farmers are naturally going to apply for the longer term in certain cases. We do not have that split of farmers who applied for longer-term loans and got shorter-term loans and farmers who just applied for shorter-term loans.

One feature of the market is that borrowers remain wary of banks. We are still seeing the SME community as a whole, including farmers, paying down debt at a very rapid rate. There is still wariness regarding being in debt to the banks for longer periods. We think there may be a fair proportion of farmers who would only have applied for shorter-term loans because they did not want to be looking over their shoulders for the next six years. They would rather go in, get what they need and get out again. The farmers who tried to get something but did not get what they wanted are more likely to come forward and ask about their situations. We very much recognise that. There are lessons we will learn from this exercise that we will try to apply going forward. As I said, this is the first time we have done a loan scheme of this nature. Many lessons have been learned.

On Senator Lombard's point about it being a unique scheme and being able to use it in different ways, the EU uses these schemes all the time all over Europe and has done so for a long time because many other European countries' banking markets are built on guarantee programmes. Portugal is a massive user in this space. Italy has something like 2% or 3% of GDP in guarantees to SMEs. It is not being used in the Irish model because the banking system grew up here in a different way. It was much more of a relationship-based model and was not built on mutual guarantee schemes in the way that the Italian or French banking systems were. European schemes are often structured this way and go straight through those systems into those markets very efficiently. They do not work the same way here and this is the first time we have been able to get one to really work. It is a great precedent to set. It is a good market to be able to demonstrate to the banks and other lenders in the future that this is how we can do this and it can work really well. Other supports at a European level that can be deployed in this way are available. The European Commission is moving and applying pressure to move away from grants towards the use of these types of financial instruments. In many cases, it can provide a simpler solution. Maybe it is a single application for a long-term low-cost easy loan to fund a piece of capital expenditure rather than a grant application plus a loan application because it is a 50:50 piece. We see other options and ways of doing things in this context that may be more useful or easier to use down the line.

In respect of the point about terms and conditions and whether we can review those, those loans are unsecured. If we find in a situation where a bank has required security that it does not qualify for our scheme, we will withdraw the guarantee. The onus is on the banks to make sure they have met the criteria and have applied the loan and lending in the right way. We have extensive audit rights under this scheme. We will have to see whether we would catch someone at that point but we certainly can include that in our audit criteria and review. We will have to do an audit of this scheme at some point. With measures like this, it is very important that we and the Department assess the impact going in and the impact coming out. We would certainly be supportive of a review after the fact to go back and see whether it did what we wanted it to do, whether it got to the right farmers and how many farmers would say in response to a survey that they wanted to get it but could not. Every farmer's situation will be slightly different. If there are situations where they are not comfortable with the terms and conditions of the loan and have chosen not to draw it down, it is quite hard to legislate for every situation. However, we would be happy to look at any individual situation if anyone wants to bring it to our attention.

We are confident that the scheme will be drawn in time given that a full set of applications is in and we know farmers will not be shy about giving the banks a hard time as to why they have not got their money yet. In some cases, there will be paperwork that takes a bit longer. We are seeing the loans come through in volume at the moment. We hope it will be wrapped up in the next couple of months and fully drawn down. We expect it to be fully drawn down.

In respect of Senator Mulherin's question about other schemes and other interest rates, this funding is comparable with a number of different options. They include overdrafts, the Glanbia MilkFlex product, which relates more to supporting investment loans, merchant credit and standard variable loans. Banks overdrafts are 9% to 12%, the Glanbia MilkFlex fund is about 4.2% and merchant credit is anywhere between 9% and 10% up to 14%. This is quite insidious because many farmers do not actually realise what they are paying in that context. Standard variable rates average somewhere around 6% or 6.5%. This is not comparable with the normal SBCI agricultural investment loan scheme loans, which average around 4.5%, because those are only for investment purposes. They are not for working capital purposes. We had to go down that route for state aid reasons.

The banks are specifically not generating any extra profit out of this scheme. This is designed to be cost-neutral for the banks. That is very important for state aid rules. We had to go through a lot of work with the banks to ensure we had the right mechanisms in place to make sure we could verify that they were not upping the price or doing something to be able to avail of some of the support that was coming through. We operate in the same way. The SBCI is a pass-through entity. We do not make a profit or major return on this. We simply charge on the small amount of administration costs of the scheme and a premium for the small amount of risk we share within the overall scheme. We design it in such a way that it is absolutely neutral from the banks' point of view so they are not making any more money but they are not making less money either.

Senator Michelle Mulherin

How is this in keeping with the SBCI's objectives to create more competition in the market when the SBCI is using them to roll out this funding?

Mr. Nick Ashmore

There is a trade-off and it is something we had to deal with when the SBCI was first set up. With schemes like this, there is real impetus to get it to market as quickly as possible. They have this unique asset, which is massive distribution channels. When we started the SBCI with our low-cost liquidity loans, we started with the banks and then started to add competitors after that.

We now have five non-bank competitors to the banks providing SBCI funding into the market and active competition. As a result we have seen a much more active leasing and HP finance market for small businesses. This is the first instance of this one. We would have dearly loved having a non-bank competitor for the banks in this space but these are term loans. In fact, almost all the non-bank competitors in the market that would compete with the banks are focused on asset-based financing, leasing and invoice discounting. It is a real challenge and is one of our core long-term objectives. We would love to get a competing term lender into the market but it is challenging because there are a number of very significant barriers to entry. First, a lender would need a distribution network. Second, it would need the right expertise. Third, it is a small market so a high quality team might seek to set up in the UK or somewhere else.

There were a couple other applicants for this scheme. Unfortunately, they did not meet the qualifying criteria. We very much hope to incorporate a non-bank competitor in a subsequent scheme. It is a question of developing the market over time. Unfortunately, we cannot fix that aspect straight away. We have seen much greater competition where we have brought non-bank lenders into the SME space on the other side. We hope for risk sharing the next time out and then, maybe in time with the credit guarantee scheme, we will be able to work with groups that are not banks to provide real competition. That is the most significant and effective way to address the interest rate premium that Irish SMEs and farmers must pay versus other countries. The Central Bank has carried out very good research on why the premium exists. It has concluded that the reason is mainly down to an historic loss rate and profile within the Irish market, which is brutal, to be frank. It also identified another element as being a lack of competition. There are indications, if we can get more competitors into the market in this area, that we should be able to bring down interest rates, but it is not something that we can do very quickly.

We collect certain data from the banks to meet the requirements of the European Commission for the deployment of its funding. We have to collect certain data for the European Investment Fund and the Department of Agriculture, Food and the Marine. We must also collect data for our own purposes so that we can track the loan portfolio and the risk we are taking. We get high level data about the loans and their duration, term, interest rate, credit rating, region, sector and size. All that is standard information. Then we get an update on the status of the loan every quarter. It shows the new balance and whether there has been a change in the loan and that kind of thing. We also have to collect verification that the farmers have made the right declaration that confirms they qualify for the loan and comply with the qualifying criteria provided by the Department of Agriculture, Food and the Marine, for which members may have seen the package provided. The declaration pertains to things like the membership of environmental schemes and other qualifying options which were part of the qualifying conditions for funding by the European Commission. We collect a good data set. We are quite careful that we cannot use the individualisation of that data under data protection rules. Therefore, we cannot survey participants on how they like the loan. We are limited in that context. We can survey, on a random basis, to track that information.

In terms of the normal lending criteria, we focused in this instance on making the loans easier to obtain by reducing the security requirement. It is another thing and much more challenging to change the credit criteria as a result of a guarantee. These guarantees are capped portfolio guarantees. There are two types of guarantees on the market. There is one uncapped. A capped portfolio guarantee says that we will take or guarantee 80% of the losses up to the first 15% of the loans to fail. We set that roughly where we think the loss rate may reach. We have designed this item to use the cash both for the subsidy but also to reserve it for the loss reserve and the COSME guarantee. We do not put them in place because they are nice to have. We put them in place because we think these losses will occur. If loan losses go beyond 15% of the portfolio, the bank is 100% at risk at that point. We are not taking away all the risk, up to 80%. We are only taking it on the first expected loss rate within the portfolio. There are other alternative European measures that provide uncapped counter-guarantees but they are more focused on innovative companies rather than smaller businesses like farms.

I will respond to the questions on the sector in general, the small food producers and food companies. The SBCI broader lending portfolio covers term lending, leasing, vehicle finance, fleet finance and invoice discounting. At the moment, the portfolio shows an average loan size of around €40,000. We have a high proportion of micro-businesses that actively borrow using that lower cost funding. Within that there is exposure to the food and food production sector. We are also very conscious of the impending impact of Brexit. We are not a policy setting body but a policy delivering body. It is important we understand what is going on in the market. Recently the SBCI actively formed its own research to collate and gather as much research and information on the SME and farming sectors as we could so that we could feed into the policy-making process and understand the issues. We hope that all this will help us design policy measures that are targeted, effective and work in the Irish market.

One of the big challenges is that while there are many supports available at a European level, without adapting them to work in Ireland, it is very difficult to get them to work here. The Irish market differs from the markets across Europe. It is different in the nature of the banking system, the attitude of borrowers to lending and borrowing, their approach to investment and the historical impact of the recession on attitudes and people's relationships with the banks, which Senator Mulherin alluded to. Repairing relationships is a work in progress. It will be some time further before SMEs are really comfortable, stop paying down debt quickly and start to borrow to invest again. At the moment far more of them use their own resources to make investments rather than borrow.

Chairman

Mr. Ashmore mentioned the future several times in his presentation. Does he envisage the SBCI being involved in a future scheme? If so, what is the timescale?

Mr. Ashmore also said that no farmer had lost out because of the qualification criteria. Is he aware of the number of farmers, if any, who did not make the cut when it came to the time?

Mr. Nick Ashmore

In terms of the future, we see the SBCI as a long-term part of the financial architecture in this country. It is a flexible and adaptable platform to deploy policy measures in different formats that are appropriate for issues as they arise. What is more, they must be structured in a way that works in the Irish market.

It is difficult to confirm a timescale at the moment. I draw the Chairman's attention to the fact that in the past hour, as this committee sat, the Minister for Jobs, Enterprise and Innovation released a press statement on the fact the SBCI works with her Department, the Department of Finance and other agencies to consider similar measures that would work for Brexit. One measure will work on a cashflow basis and the other will work on an investment loan support basis. They are very much development activities and no concrete details have been confirmed. A decision has been made to progress with developing those types of initiatives. They are certainly not something we will bring to the market very quickly. Typically, as we have seen with the agri-scheme, it can take up to six months to do these things. A lot of work still needs to be done on them.

We do not know the number of farmers who did not qualify for the scheme. We know that all the ones who have come through to us on the system have qualified. One query may have gone back for further information.

Chairman

Would people form a queue if the SBCI opened a scheme tomorrow morning?

Mr. Nick Ashmore

Yes, simply because the scheme was priced at an attractive level. It is important to note that the scheme was built off the back of a piece of exceptional aid from the Commission. That aid came not just with cash but with an opportunity to put in a further matching amount from the State. The scheme opened a window in the state aid rules that allowed the funding to be deployed in this way.

That accounted for approximately €21 million of the funding, the remainder of which was allocated to be able to support non-livestock farmers, that is, farmers in horticulture, tillage and so forth. We deployed loans in that sector under the de minimis rules. The state aid window applied only for that point in time. The lack of such a window thereafter meant we could not, off our own bats, decide to do another scheme like this in the same way. De minimis is an open-ended arrangement but in this case it is available for a much smaller proportion of activity. We found that these exercises need to have a certain amount of scale if they are to work. While we do not how much more demand there would be if the scheme were still open, there would obviously be more demand.

Deputy Michael D'Arcy

On the eligibility criteria, Mr. Ashmore indicated that he does not know how many people have been excluded from the scheme.

Mr. Nick Ashmore

What we see are those who have qualified under the scheme. We will guarantee up to €150 million of lending across the three banks and the main concern for us is to ensure we are guaranteeing loans that qualify and meet the terms and conditions. Unfortunately, it is impossible to know how many more there may have been after the point at which the banks decided to close the scheme to new entrants.

Deputy Michael D'Arcy

I am talking about the eligibility criteria.

Mr. Nick Ashmore

We designed this to work for every sector. As the exceptional aid only came for livestock farmers - which caught a vast number of farmers - the Department and Minister were very concerned to ensure we made this work for all farmers, not only livestock farmers. The additional funding was provided and the de minimis arrangements put in place for this reason. In the past, we have not used de minimis state-aid options for lending because, for instance, many beef farmers get a lot of emergency fodder in and one does not know from one year to the next whether they will need it. If they have used up their de minimis allocation on a loan, they would be precluded from getting that.

Deputy Michael D'Arcy

I am talking about criteria relating to farm partnerships and the green low-carbon agri-environment scheme, GLAS.

Mr. Nick Ashmore

The intelligence we received from the Department was that pretty much everybody would qualify under at least one of those schemes. We have not heard of anyone who has been excluded on those grounds.

Deputy Michael D'Arcy

Is Mr. Ashmore stating that nobody is being excluded?

Mr. Nick Ashmore

As far as I am aware, nobody is being excluded. One of the things we should do at the end of this process is to conduct a survey to find out if there were instances of farmers who were in those circumstances.

Deputy Michael D'Arcy

I suggest such a survey be done now.

Mr. Nick Ashmore

I take the Deputy's suggestion but it would be a little tricky because a great deal of data and information are still coming through.

Deputy Michael D'Arcy

If the SBCI were to assess the information that is currently available, it would be able to ascertain whether people have been excluded. If people have applied to one of the three institutions and do not meet the criteria, they will not have an opportunity to secure a good value loan at an interest rate of 2.95%. Mr. Ashmore stated that the intelligence available to the SBCI from the Department indicated that everybody would be covered. It is important to find out, sooner rather than later, whether that is correct.

Mr. Nick Ashmore

While I understand that, unfortunately the eligibility criteria are applied to the European Commission funding, which means that anyone who did not qualify under one of the conditions would not be eligible under the scheme. The exceptional aid came through in the European regulation.

Deputy Michael D'Arcy

Perhaps Mr. Ashmore will make the specific regulation available to the committee.

Mr. Nick Ashmore

Yes, I will do so.

Chairman

I thank Mr. Ashmore and Ms Sweeney for appearing before the joint committee. It is useful to have an ongoing engagement on this matter. Representatives of the three financial institutions involved in the scheme will appear before us next week as a follow-up to today's highly useful presentation.

The joint committee adjourned at 6.55 p.m. until 4 p.m. on Tuesday, 9 May 2017.