JOINT COMMITTEE ON ENTERPRISE, TRADE AND INNOVATION debate -
Tuesday, 6 Jul 2010

Funding to Small Business: Discussion

Chairman

I welcome Mr. Pat Farrell, chief executive and Mr. Anthony O'Brien, research and publications executive of the Irish Banking Federation, and Mr. Joe Carr, managing partner and Ms Dera McLoughlin, partner and head of consulting at Mazars Ireland. The Irish credit review group was also invited here today, but was unable to attend, pending the laying of its quarterly report before the Houses of the Oireachtas by the Minister for Finance.

By virtue of section 17(2)(l) of the Defamation Act 2009, you are protected by absolute privilege in respect of the evidence you are to give this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise nor make charges against any person, persons or 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 that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I now call on Mr. Farrell to address the committee.

Mr. Pat Farrell

I thank the Chairman and committee members for giving me the opportunity to be here today. The focus in recent times has been on the SME sector, but I thought it important to widen things out and talk about the extent of credit support generally to businesses in Ireland. The figures in the first slide of our presentation are from the Central Bank and they show that in the last few years, there has been a steady and substantial increase in the total amount of credit advanced by banks to businesses. It has been divided out over five years. In 2009, the total amount of credit given to businesses amounts to €160 billion. This includes agribusiness and the agricultural sector generally.

The value of credit fell in 2009, but is still much higher than the amount provided in 2006 and almost the same as 2007. I make that point because if we look at the economy, it has shrunk back to below 2006 levels. Therefore, I would contend that the level of business credit out there is still, in relative terms, equal to the level of economic activity.

The next slide is about what we do to support businesses in general. There is €84 billion worth of credit provided to the real economy business sectors, of which €32 billion is provided to the SME sector alone. Of that amount, €5.3 billion goes to agriculture, fishing and forestry, €11 billion goes to the hotel and hospitality sector, over €7 billion goes to manufacturing and nearly €13 billion goes to wholesale and retail trade and repair businesses. The source of these statistics is the Central Bank. We have excluded sectors such as speculative and development construction and speculative investment, as well as non-bank lenders and funds.

We are very committed to supporting viable and sustainable businesses through these challenging times. We should bear in mind that GNP is down by 3.5% in 2008 and nearly 11% in 2009 and since the downturn began, the aggregate decline in GNP is closer to 20%. Retail sales are down 4.5% in 2008 and 18% in 2009. Overseas visitors to Ireland are down by 21%, while the cash flow of 64% of businesses is affected by late payments, according to statistics from the SFA. These are the issues that are challenging businesses at the moment, and it is in that environment that the sector continues to lend to SMEs. Looking ahead, the OECD has forecast growth in 2011 of 3%, while the same body has forecast that exports in 2010 will increase by 3.7% and in 2011 by a very healthy 5.2%.

We know that the times are very challenging for SMEs. They face a sharp decline in domestic demand, while at the same time they are struggling to get paid. That is having a very direct impact on our cash flow and that is the lifeblood of any business. If they do not have cash, they will not be able to continue to function. According to reports from Mazars, one third of SME customers are struggling with loan repayments. Under different classifications, they are breaching their loan covenants and are struggling to service the level of debt in their business or that they owe to banks. I would like to think that we are still helping in that very difficult environment, and we also have to be mindful that the money has to be there to support businesses now, hopefully as we get into a situation where growth picks up again.

Around €5 billion was provided by banks in new SME funding in 2009. This money was provided for a variety of purposes. Much of it went towards working capital requirements, because this is the area where businesses will have the greatest level of stress. Money also went into start ups, because these are critically important to replenish the job losses that are occurring elsewhere in the economy. A very important channel is available from the European Investment Bank, and €300 million was made available by that agency to the banks in 2009. Almost all of that money has been committed. It is hoped that further substantial funding will be sought from the same source before the year is out.

The banks themselves are supporting the viable SMEs that are in difficulty. In many cases they are working with firms to restructure debt. They are giving businesses the breathing space to return to profit. Much forbearance is being shown. In some cases, customers may be fully drawn on their overdrafts and it may be more suitable to convert that debt into a term debt because it is cheaper for them. These measures are expensive for banks as they use up scarce capital, but the focus continues to be on supporting businesses in these categories.

There have also been a number of publicly announced schemes. One particular bank has announced a small business recovery scheme involving €500 million worth of funds, and it has directly targeted businesses that are currently very stressed and would not qualify for support under normal lending criteria. One other bank has set up an additional support fund of €250 million, while a third bank has put together a package on all island basis valued at €1 billion. Many non-financial, advisory and mentoring services are also being provided, and I would encourage SME owners to talk to their professional advisers when reassessing their finances and business models. If they need to adopt to a changed market, then apart from looking at pricing and costs, they also need to engage at an early stage with their lender with the various agencies providing support. They will find that such support is available.

In terms of the Government's recapitalisation programme certain agreements were made with those banks, and banks outside the programme have also committed themselves. Taking the totality of the commitment that all the banks have made for this year and next, there will be at least €14 billion in small and medium enterprises, SME, funding available for new or increased credit facilities. Those figures have not yet been bottomed out or finalised and members will have read in the media that discussions are ongoing between the Department of Finance and some of the banks concerned about those lending plans. It is more about detail than quantum of money, although the money has been committed.

In addition, there is independent oversight and a statutory code of conduct for business lending to small and medium enterprises. This applies to all banks in dealing with small and medium enterprises and aims to provide reassurance and independent oversight to SME customers in dealing with banks on a number of dimensions. First, it facilitates access to credit for sustainable business propositions; it is designed to promote fairness and transparency in the treatment of SMEs; and it looks to assist borrowers when dealing with arrears cases. I have already referred to the fact that many businesses have to restructure their facilities, which this is designed to deal with.

I note that for various reasons representatives of the credit review office could not be here but that office was recently established and provides a second leg of reassurance and oversight to the process. The office has been set up under Mr. John Trethowan and is tasked with first looking at trends within the banks in terms of lending to the SME sector, reviewing practice and considering decisions made by banks in cases where they may refuse or reduce credit. The people involved have the right to go to the independent credit review office to have that decision independently assessed and reviewed. Part of the SME lending code tasks each bank, where it makes a refusal, to specifically notify the customer of the existence of the credit review office, its remit and the right to make a direct complaint or appeal to the office.

New loan demand has declined in line with the overall decline in economic activity. Credit demand from SMEs has declined steadily since April 2007. There is much negativity and I would be very sorry if an SME succumbed to such negativity or took it that banks should not be approached because of the negative comment. The SMEs should approach a lender and follow through on applications. They should ensure there is a paper trail because we have heard some comments to the effect that somebody made an informal inquiry but was told not to pursue it. The application should be put in writing so there is a record.

The right information should be given so that lenders can make the right lending decisions. Sometimes credit applications may not have the full amount of information required and in the process there might be a delay while further information is sought. The more quickly people can assemble information and know what is required, the sooner an application can be turned around with a decision made.

If an applicant is unsuccessful, I would unambiguously and vigorously advocate that people use the credit review office process and the SME code on lending for small business if the applicant believes the process has not been followed, that he or she has been unfairly treated or if the application has not been handled in a transparent and open fashion. I have no hesitation in saying that. A bank's internal appeal system can be used, which all banks make available to customers. A group of senior personnel in the bank, independent from the original lending decision, would assess the case anew and determine whether the first decision was correct or should be amended. Beyond that people can go to the credit review office. Every person who is declined credit will be informed by the bank of his or her absolute right to appeal to that office.

In addition, we are engaged with several Departments and agencies on behalf of the sector and the sector itself has been directly engaged. We have regular meetings with the Department of Enterprise, Trade, and Innovation, the Department of Agriculture, Fisheries and Food and the Department of Finance. We meet representatives from Enterprise Ireland regularly in trying to develop banking expertise and services to support modern growth sectors in the economy. There is much start-up activity in technology, life sciences and around the green agenda. On behalf of the sector we are committing to engage with Enterprise Ireland and the people developing business in these areas to understand businesses and funding needs better.

We facilitated an independent review of SME lending, which was directly requested by the Minister for Finance; the witnesses from Mazars will speak about that more directly. We are also co-operating with the Central Bank, which intends to develop its own data collection series, and this will be launched quite shortly. We have ongoing direct engagement with SMEs and other organisations representing other sectors of the economy. We participate in the Department of Enterprise, Trade and Innovation's credit supply clearing group and all the subgroups.

As a representative body we have made a number of practical actions in addition to what has been done by member banks. We have been challenged, correctly, that we must improve information and promote better understanding across the SME and other sectors about how to interact with a bank and gain access to credit. We have published information disseminated through the web and in print across branch networks. We explain how the credit rating process works and the impact of Basel II, which is affecting a bank's capital requirements, and the effects on business customers. We have a check-list for applicants in the hotel sector in particular because that was sought by the sector. We have also done a similar list for farm business and developed an IBF business switching account code, making it easier and more straightforward for businesses to switch current accounts between banks if they choose to change their banking relationship.

Sustainable businesses are being supported by banks through these very challenging times and I do not under estimate the difficulties and challenges facing SMEs. To support economic recovery there is a minimum of €14 billion in funding being committed over the next couple of years across the banking system in additional funds. There is an independent oversight and review system in place and I am sure that not far in the future the committee will hear directly from the credit review office and the Financial Regulator on the results of their reviews and oversight.

We need to restore the confidence of SMEs in the lending process and I know that because of publicity, some SMEs may not go near their bank because it is thought credit will not be forthcoming. That is a bad decision as a person never knows until the question is asked. We have all the other safeguards in place and there are several processes of review, even if a decision is adverse in the first instance. I encourage viable SMEs who need credit to apply to their bank.

Chairman

I call on Ms Dera McLoughlin to address the committee. She has provided nine very comprehensive pages but perhaps she would give an overview of the main issues rather than read the whole submission. It will be included in the committee's information.

Ms Dera McLoughlin

I thank the committee for its invitation to attend the meeting. We are here in our capacity as authors of the Mazars reports on lending to SMEs and we can comment on funding to small business in the context of the three reports on lending we have prepared covering June 2008 to December 2009. Our reports have their origin in the bank recapitalisation programme under which the recapitalised banks agreed to facilitate an independent review of lending to SMEs.

Our initial two reports were discussed in detail with a credit supply clearing group, which is a group established by the Department of Enterprise, Trade and Innovation. The third report was essentially a continuation of the process. All our reports were prepared in accordance with the same methodology and all have been presented to the credit supply clearing group, which includes representatives from the Departments of Finance and Enterprise, Trade and Innovation, Enterprise Ireland, the IBF and all the banks and business groups such as Irish Small and Medium Enterprises, the Small Firms Association, Chambers Ireland and so on.

Our reports considered lending across five banks, which are Anglo Irish Bank, Allied Irish Banks, Ulster Bank, Bank of Ireland and National Irish Bank. Recent comments on the Mazars reports, as well as wider ongoing debate on the issue and problems facing SMEs, are indicative of the difficulties all businesses are facing in the current climate. In framing our presentation of the reports we should say that we were asked to do a job in examining lending to SMEs and produced three comprehensive reports. There is no other accurate information available in Ireland on lending to SMEs and prior to the publication of our reports, there was no information available at all.

There has been much comment on our reports, some of which is inaccurate, unfounded or even damaging to the critical messages in the reports. We appreciate it may be frustrating that additional questions were not asked in our reports and it may also be frustrating that additional information is not available to us to report on at bank level. Given the pressures under which business and policy makers work it would be a pity if the analysis of our reports focused only on the gaps in the reports as distinct from the comprehensive information they provide. The recommendations that were included in our first report, some of which, such as the credit review office mentioned by Mr. Farrell, have been or are being implemented. Mazars is an independent audit and advisory firm. We have a professional reputation which is very strong and we would like to encourage a fair and balanced reading and discussion of our reports. I see members have been given a copy of one report but would encourage them to read some or all of the three reports published by the Department of Finance.

I move to the specific findings of our report and will try to summarise some of them. We produced three reports which examined loans, overdrafts, finance and leasing and invoice discounting, examining lending under those headings. Essentially, we looked at what is being lent to small and medium-sized enterprises, the inflows and outflows from that process, from a customer perspective, the demand for lending from banks, what banks are approving and declining and what customers are drawing down, namely, what they are using on an ongoing basis. Our report shows that just over €32 million has been lent to SMEs as of December 2009, the date of our most recent report. This has fallen slightly, by 4%, since the period during which we began reporting. Loans represent most of the lending and the biggest drop in lending has been seen in products traditionally used to fund capital development and expansion, such as invoice discounting and finance and leasing but that is probably not unusual. In our initial reports we also did a customer survey. In a very robust, statistically representative manner we asked SME customers their experience of lending. They told us that while trading conditions are very difficult the demand for lending had fallen among SMEs. They were looking primarily for funding or lending products to finance working capital type of activities. Micro companies, those with fewer than ten employees, were worst affected.

We can look at the bank side of that and our report is the only one that has access to bank information, seen on page 4 of my document. It would appear that the demand from a customer perspective has fallen very significantly in 2009 compared to 2008. Since we began to collect information it has fallen by about 50%. Page 5 shows approvals and declines. In the last quarter of 2009 just over €1.6 billion in new credit was approved by the banks, representing about 29,000 applications, which is significantly lower than in previous periods. If we compare what the banks say they are declining, and what we see on the customer side, there is a gap of about 10% to 12%. From our perspective that gap is largely due to information not captured by the banks in regard to inquiries as distinct from formal applications. If I go into a bank and make a formal application that is captured on the bank's system; if I have a discussion with my bank manager or make an inquiry rather than a formal application it is not captured.

There are a couple of other lending indicators we reported upon to which I draw members' attention. The first point relates to draw-downs. All the funding being approved is not necessarily being drawn down by SMEs which drew down about €1 billion of new credit in the last quarter of 2009. That represents a drop compared to previous periods. SMEs are drawing down less than is being approved. If we look at overdrafts, there is significant capacity remaining in the system in regard to overdrafts which are the main source of working capital finance among SMEs. Approximately 48% of overdrafts which have been approved remain unused meaning that SMEs have not used about €2.6 billion in approved overdrafts. If we look at how quickly SMEs are paying back their credit as distinct from drawing it down we see they are paying it back more quickly. The average repayment period for a SME at present is about 5.2 years; previously it was slightly higher.

The main point to which we would like to draw members' attention is the quality of the SME loanbook which is a figure or item of our report that we think may have been overlooked slightly in terms of its importance. We divided SME lending into three categories: those SMEs that are performing or are in a position to repay in accordance with the terms of their lending; those that are on a watch list; and those that are impaired or due for more than 90 days. Our report shows that more than 35% of the book, or more than one third of SMEs, are having difficulty in repaying their credit facilities at present. From our perspective, that is the most significant factor in our reports.

If one puts SME lending into context when compared to other factors in the economy it is clear that lending to SMEs is falling but not falling as quickly as other lending in the economy and the demand for credit has fallen more significantly than other demand factors in the economy. It is clear also that, broadly speaking, the quality of lending — I refer to the 35% of SMEs I suggest are overdue on their repayments — is following other patterns of stress in the economy, such as unemployment, insolvency and so on.

Our first report made a number of recommendations, some of which are being implemented, and I draw the attention of members to those. They include the extension of the current code of conduct of lending to SMEs to an earlier stage in the lending process, which means going back to inquiries, the formal monitoring of compliance with this code, more reporting by banks, the extension of reporting to include additional types of information over time and the examination of risk sharing structures to support access to credit by SMEs. That last may require some form of policy intervention and might include, for example, measures to ease working capital requirements such as credit guarantee schemes, prompt payment support, measures aimed at helping SMEs to maintain investment levels. It is very clear at present that SMEs are focusing very much on working capital which means they are not investing in the long term and over time that may become an issue. There was a recommendation for the establishment of an independent credit support service, a model in place in Belgium and France, for example, that would be available to SMEs to help them submit an application to the banks. This might assist them in resolving their arrears or repayment problem and assist them in an ameliorative capacity in resolving their differences when they are refused. That last recommendation is being implemented as part of the credit review office.

There is also need for greater information exchange between banks and SMEs. There is a very significant gap in perception as to the availability of finance and the manner in which one goes about seeking finance. We made a number of recommendations in that regard.

Our reports have their origin in the recapitalisation programme. Our role in that reporting process is one of an independent party. We are responsible for the review, collation and analysis of information. Our reports have answered a number of questions we were asked to answer. Our third Mazars report shows that lending to SMEs is approximately €32 billion and credit applications or demand for credit have fallen by about 50% since 2008. The key issue highlighted by our reports is that more than a third, or 35%, of SMEs are having difficulty in repaying their credit facilities. That is the most significant figure emerging from our reports. Our perspective is that what can be done to alleviate the stress of this 35% of SMEs is probably the most urgent and critical issue facing policy makers at present.

Deputy Deirdre Clune

I thank the delegates for their submissions. Many members of the House have concerns about the difficulties small businesses have in accessing credit. In my constituency, as I am sure is the case for other members, people mention this when they visit me. Last week I spoke to a person running five pubs in Cork city whose overdraft facility has been removed. His business is long established and has been running for more than 20 years although obviously he was not at that level for 20 years. He thought he had a good relationship with his bank but his overdraft facility has gone and he finds it impossible to operate his business without it.

Hearing that, one realises there have been changes in bank lending policy. The situation is obvious. We are hearing more about people being squeezed whose businesses are viable and have a strong track record. That is the perception and it is the reality for many businesses. These are good performing businesses but they are being squeezed and forced to take the pain for what is happening within the banking sector.

I realise we are hearing both sides of the argument and there are figures in front of us but the reality on the ground is that existing companies are suffering. We have a presentation on the funding which will be available for new businesses but it is a difficulty which existing businesses have. It is a question I am hearing again and again. I am not satisfied, based on the presentation I heard today, that situations such as that can be addressed. The word on the ground is that local banks are taking their instructions from head office and have shut down. Nothing is moving or happening and banks are told to work with what they have and try to extract as much as they can from businesses.

Mr. Pat Farrell

I would not like to create the impression that everything is rosy in the garden. Banks make thousands of credit decisions on a daily basis. I am sure at the margin some people who probably submit worthy credit applications are turned down and people who should not get credit get it. Policy has not changed as much as the environment, which has changed dramatically.

I ask the committee to consider the following: if 35% of the existing credit available to SMEs is distressed to the point where it is 90 days or more overdue, banks have an absolute obligation to factor that into their thinking. If a company cannot meet its obligations for its current credit facilities, how could any credit decision be justified which would advance more money to such a business when it does not have the capacity or the capability for the foreseeable future to pay back the money which has been extended to it? That is the dilemma.

For the bank to throw good money after bad will not solve the problems of the business and will create even more problems in terms of the capital requirements of banks and the obligations they have to restore themselves to health and getting their lending practices on a sound footing. I accept and understand that there are very real stories and cases out there. It is difficult for me to be able to comment on any individual case because we all hear the case from the person's perspective. To be fair, if one has a struggling business which one has built up over the years and it appears it is no longer viable on any objective basis, one is emotionally tied to it and will always fight to keep it open.

However, the sad fact is that some businesses are not viable in the medium or long term. I said earlier that a number of banks have introduced discreet funds which are designed to address the issues to which the Deputy referred, namely, businesses who would not satisfy the criteria. There is another point which Ms McLoughlin mentioned in her report. If the risk profile of businesses is at its current level, which is accepted and acknowledged, the only way one can change the credit policy if one brings some kind of public policy intervention into the system, along the lines of the loan guarantee scheme. The first Mazars report was issued in——

Ms Dera McLoughlin

In June 2009.

Mr. Pat Farrell

It said that. We subsequently did some work on it to examine schemes across other countries. In most EU countries one of the features of the support platform which is currently available to businesses is the loan guarantee scheme. I do not want to create the impression loan guarantee schemes are the panacea for all the issues but at the margin it is possible and probable, and has happened in other countries, that a loan guarantee scheme could change the risk profile of a lending decision and might be enough in the cases where an application is not getting over the line to bring it over the line. That is something to which Ms McLoughlin referred in her report and we have also commented on it.

Chairman

That is perfect. I advocated that last weekend. It is working perfectly in Britain. Alastair Darling extended it in the March budget. It has worked perfectly in Singapore for the last number of years. There is precedent for such a scheme. Nevertheless, when we meet people who run small businesses or farmers, whom we met an hour ago, they tell us there are two Irelands. There is an Ireland where the perception is that the banks will meet people and do this, that and the other. There is also the Ireland to which Deputy Clune referred, where people are called in for an overdraft review and are hoping that if one has €25,000 one might get €30,000, but instead the bank tells one it has been reduced to €10,000, if one is lucky, and one is on strict monthly terms.

Most of the businesses in such a situation have been in existence for 25 or 30 years. They are hitting a dip. We all know that. The delegates' point is well made and hard to refute, but at the same time banks that have been recapitalised with taxpayer's money are adopting that type of attitude to businesses which employ 700,000 people in SMEs. Businesses say banks got their loot indirectly through the 4.5 million people in the country — the size of Birmingham or Manchester. We have put in all that money. I know banks have criteria and obligations to shareholders but in this instance the major shareholders are Paddy and Bridget. They say it is better to keep their children working in small business and for the banks to take a chance with them to try to help them, rather that saying, "We are pulling up the drawbridge now and whoever is left behind is left behind".

That is the perception. That is the second Ireland. There are people who are struggling. The delegation is out and about. What do we say to people who cannot get credit? The Mazars report is fine to a point. Let us be clear. People come to us and say they had a chat with a person in the bank who told them they should know the situation and that it had no money and cannot lend. I refer to general enquiries, which are not covered in the report. It is a substantive application in the person's mind when he or she starts making an inquiry and baring his or her soul. I am not prepared to accept that this reality has not been captured in the report.

Let us be frank with one another. Billions of euro have been put into the banks. The ordinary members of the public, who are generating new business and sustaining existing businesses, feel they are not being treated fairly. I am saying what I have heard, which is my job. The delegates also have a job but I have to reflect my job or I am not doing it properly. I wanted to comment on that. Am I mad or am I not hearing correctly?

Deputy Chris Andrews

The Chairman is definitely not mad.

Chairman

Maybe I am. I have come from a meeting at which we debated nitrates directives. I asked one farmer what the big issue was and he said I was not a fool, it was trying to get a few shillings or an extension to an overdraft to keep the show running. The report stated 35% of loans are impaired, which I accept. However, if that was the position should we not have taken that attitude with the banks? I know we need a functioning banking system. I proposed setting up a new strategic investment bank because I believe some of the Irish money in the National Pension Reserve Fund should have been put into such a bank with nothing behind it. That is a policy issue which we have to fight on another level.

Ultimately, the money of general taxpayers has been put into the banks and we are wondering if some leeway can be shown when somebody applies for an extra €10,000 overdraft for a business which, as Deputy Clune said, has been in existence for 20 years. How could one maintain a licenced vintners operation without an overdraft? If the banks do not provide overdrafts the business will cease to exist. The delegates cannot comment on individuals and are not in a position to do so, which I accept, but I want to hear about the broader policy framework.

We thank the delegates for coming before the committee. We know what they are trying to do. People are telling us it is not enough.

Mr. Pat Farrell

That is a fair challenge. There is no question but that €160 billion in credit has been extended to businesses. Some €84 billion credit has been extended to businesses in the real economy, of which €32 billion has been extended to SMEs.

If one considers this matter on a rational basis, it is obvious that the banks will not survive if they do not continue to do business with sustainable SMEs. The banks need customers. I am not stating that it emanated from the Houses — I have not heard it put forward at this meeting — but the argument has been made that all credit has been withdrawn from all businesses. If that occurred, the entire SME sector would be wiped out and, as a result, the banking sector would disappear. Those in the banking sector are hardly foolish enough to try to eat their own lunch.

The banks have to have an alignment of interests in trying to support viable businesses. If, however, the economy has shrunk by 20% or more, then it can no longer support the level of SME and other business activity that obtained when it was at its height two years ago. If there is that type of shrinkage in the SME sector, there is going to be distress and people are going to struggle to meet loans. It is not surprising that 35% of loans are not performing. It is not possible to lend more money to a business which cannot meet its existing obligations. In some circumstances it is possible to restructure overdrafts by transforming them into term loans, extending the term relating to them or refinancing them in a cheaper form.

Chairman

That is what I mean.

Mr. Pat Farrell

That is happening. Overdrafts are being converted into term loans, the period relating to their repayment is being extended and the level of interest being charged in respect of these loans is much lower than that which obtains in respect of overdraft facilities.

I cannot comment on individual cases. The point was made earlier, however, that some 50% of the €2.6 billion that has been authorised for overdraft facilities remains unused. I accept that this is a general statement but some €1.3 billion that is available in the form of overdraft facilities has not been drawn down by businesses. It is clear that they are not drawing it down because they do not actually need it. However, it is available as a support.

Deputy Damien English

People use overdrafts as a back-up at certain times during the year.

Mr. Pat Farrell

The Deputy is right. People have to think about the use of overdrafts across the year.

Deputy Damien English

One cannot plan one's business without an overdraft.

Mr. Pat Farrell

Yes.

Deputy Damien English

Whether overdrafts are used is irrelevant. People need access to overdraft facilities.

Mr. Pat Farrell

Yes.

Deputy Arthur Morgan

If the figures Mr. Farrell has provided are correct, then I and all the other members present are meeting people who are bare-faced liars on a weekly if not daily basis. There are those in the SME sector who have outlined their circumstances to us, indicated how they made applications for loans — in order to accommodate, for example, business expansion plans — overdrafts, etc. I am, therefore, obliged to ask if it is the case that Mr. Farrell's figures are correct and if the answer is yes, then the people who are making representations to me are bare-faced liars.

When considering this matter, I am obliged to judge the record of bankers appearing before various committees of the House. If Mr. Farrell wishes, I can provide him with chapter and verse with regard to the details of that record. However, I suspect he already has a fair idea of the nature of the record to which I refer. Representatives from NAMA recently appeared before the Joint Committee on Economic and Regulatory Affairs and informed members that the banks are not providing NAMA with accurate information. If the banks are misleading the very organisation that is shovelling taxpayers' money into their coffers, what chance do Members of these Houses have, even at this late stage, some accurate information from bankers?

What chance do poor unfortunate individuals who are trying to operate grocery stores or pubs have if they cannot obtain access to credit? I accept the veracity of the example that was provided earlier and I could provide details with various neighbours of mine who are experiencing similar difficulties. The neighbours to whom I refer are not involved in the pub business but rather in processing.

I do not like making comments which some might find personally offensive. I hope what I am about to say will not be taken that way. However, I and other members are here to convey the message given to us by the people we represent. It is time for straight talking. As far as I am concerned, the banks have a responsibility to deal with struggling but viable businesses. The customers of the company of which I am a director are not in a position to pay their bills. In such circumstances, one does not increase one's prices, one reduces them and deals with one's customers on a cash basis, if possible, for a short period and one utilises a tighter timeline in respect of payment. One does anything and everything to ensure that one's customers remain viable.

If the type of co-operation among SMEs to which I refer did not exist, the situation would be far worse that it is at present. I put it to Mr. Farrell that the banks are not playing their part. They received money from the Government that was supposed to be loaned to SMEs but they have not extended credit to the latter. I do not know what is going to happen.

There is no point in my continuing to comment in this vein because I do not know when I will reach the point where I will believe what the representatives of the banking sector are saying. I hope I might reach that point soon but I do not believe that will be the case. I am a long way from reaching the point to which I refer and I believe my view is echoed among members of society in general. I am not having a go for the sake of it; I am conveying to our guests the content of representations I have received from people I believe and trust. I have lost both belief and trust in the banking sector. I will move on because commenting on this matter is what Joe Higgins, MEP, once described as trying to play handball against a haystack.

Enterprise Ireland put some of its staff in place in the banks in order that the personnel there might be reskilled in respect of evaluating loans for SMEs. Is that process still in train? If the answer is yes, when will the process come to an end and when will the banks be in a position to proceed under their own steam in respect of this matter?

Ms McLoughlin stated that Mazars relies on self-declaration on the part of the banks. She has heard what I have just said. How does she evaluate the self-declaration made by the banks? Does she have any means of verifying that self-declaration? Is there an audit system in place or does she rely on cross-checking the figures? Ms McLoughlin will appreciate that my opinion of the self-declaration carried out by the banks is quite low.

With regard to the 35% of SMEs that are struggling to meet loan repayments to their banks, is there any research available in respect of the disposition of those companies? I suspect that it is not just a matter of them losing their customer base. It is often a question of cash turnover because many of these companies retain a percentage of their customer base which is significant enough to make them viable. I accept that such companies might be struggling but they are viable. It is the level of cash turnover which is the major factor for these businesses. Are our guests in a position to verify whether this is the case in respect of the 35% of SMEs that are in difficulty?

Businesses such as those to which I refer sometimes remain viable and should be kept going. If they can retain a few major customers while reducing their overall customer base to a significant degree, there is hope that if we can work through this bloody economic crisis we are experiencing, these businesses can be saved. It is my strong view that the banks have an obligation to work with these businesses.

Ms Dera McLoughlin

On self-declaration, the committee only has a copy of our third report and not the first and second reports we compiled. As part of the process relating to our first two reports, we carried out full audits in each of the five banks concerned and established reporting procedures and controls, checks and balances. In the third report, we did both. The banks engaged in self-declaration and then we audited the figures. The only purpose of explaining it in the third report is that we tightened up the process and made it easier to manage. We are auditors and we did independently verify the figures. We would not publish a report unless we were in a position to do the latter.

The Deputy also asked about the facts relating to the decline or approval of credit applications. We carried out the largest customer study ever conducted of SMEs in the country. We examined every sector proportionately in terms of the number of companies trading in the sector, their profile and whether they are micro, small or medium sized. The decline rate from a customer perspective — this study was based on customers' responses obtained in a scientific fashion — was 24% or thereabouts. Those are the facts on those companies.

In terms of the banks' side, we have gone under the bonnet and examined the facilities in place in terms of individual banks. Certain sectors have found it more difficult than others. A question was asked about the hospitality sector. In the most recent period €125 million of new credit was approved in that sector. One might ask if that is lower than in other sectors and it is. There are certain sectoral differences across the economy, and that is an important point.

A point was also raised about the agricultural sector. A large number of applications have been submitted by that sector as one might expect. In the period concerned, approximately €400 million of new credit was approved in that sector. I can obviously comment on anecdotes but those are the facts in terms of the banks' systems.

On the Deputy's other question on the 35% of distressed companies, we have some sense of the profiles of those. The level of turnover in those companies and the number of employees in them have fallen very significantly. On average, turnover in the SME sector has fallen anywhere between 10% and 20% and the number of employees in companies in that sector have fallen anywhere from 15% to 25%. That is the backdrop to some of the lending decisions. If a company's turnover has fallen by 20%, perhaps some of its capacity has fallen. The companies in that 35% category have experienced a significant drop in their business.

Mr. Joe Carr

I am not here to speak on behalf of the banks, but I reiterate that the report indicates that approximately 24% or 25% of those customers are not getting credit when they want it. That is a significant proportion of the total number of SMEs.

The second point the report indicates is that 35% of those enterprises are in distress. That is the picture in this sector, and it does not rely on the banks' data but on a study based on customers having been asked what they want. It is up to the policy makers to reconcile matters, but based on the data we have examined companies in certain sectors are quite distressed and there are profiles of certain sectors that are quite distressed.

Deputy Chris Andrews

I welcome the representatives of Mazars and the IBF. This is a difficult time for everybody. When one notes there were 18 repossessions in the courts yesterday, it is easy to get carried away with all the negativity. However, many positive things are happening, although such repossession is a tragedy for those 18 people, but I understand most of the mortgages involved were sub-prime. The main banks, Bank of Ireland and AIB are not involved in this respect. They have been responsible in terms of how they have dealt with home owners.

It was mentioned that 35% of loans are impaired. It is important to recognise that we are in a recession. I do not know what is in it for banks to turn away applications for credit from viable businesses, a point to which Mr. Farrell referred. I hear stories in this respect from people who raise issues with me. Often when one goes a little deeper and examines the request submitted all is not as it seems. Clearly, the banks have not behaved well in recent years. Everybody accepts that. There are serious problems. However, the Bank of Ireland has turned a corner and it has been the first to come out of the ongoing mess, and that is a positive sign.

Will one of the representatives from Mazars explain specifically why when ISME has produced reports on lending its percentage for credit refusal is 55% compared to the refusal rate of 20% given in the Mazars' report? Why does Mazars not make provision for oral applications for credit in its figures? Would it be helpful if the banks were to give more information on this and, if so, what sort of information would be required to assist in completing the picture on the SMEs in this respect?

Mazars report that 84% of loans applied for have been approved but how many of them were approved for the amount requested? I refer to a case where a person applies for a loan for €1 million but is only given €500,000. One of the representatives might give some information on that? Clearly, people are scarred from what has happened. However, having regard to the Bank of Ireland, Richie Boucher appeared before a meeting of the Joint Committee on Finance and Public Services. He is doing a very good job in very difficult circumstances, and the same applies to Colm Doherty.

Chairman

Most of those questions are for Ms McLoughlin.

Ms Dera McLoughlin

Deputy Chris Andrews's first question related to other surveys. I will be general in my response and refer to other surveys. I do not see the detail of individual surveys. My understanding is that some of the other surveys — I am not singling out any in particular — are not perhaps carried out in the same scientific fashion as ours are. We examine the number of companies in individual sectors and whether they are micro, small or medium sized to ensure that we have a representative sample. Therefore, our study is not random but very focused.

We also have access to all of the bank data; no other surveys have access to that. We can see what is happening on the banks' side and we can go under the bonnet in that respect. Ours are the only official lending studies. They are the only ones that have been published by the Department of Finance. They are conducted in a very scientific fashion, are representative of all sectors in the economy and of all sizes of companies in the economy, and are conducted in a very scientific phone-based fashion. We telephone individual companies and talk to the managing director or finance director. Therefore, our studies are very robust. The Deputy might draw his own conclusions on the other surveys.

Mr. Joe Carr

This point was raised particularly at the steering group in terms of the first report. Our equivalent figure was a decline of approximately 24% on the basis of a customer survey, while others had said the percentage was as high as 50%. That was the difference. The consensus view of all the people around that table at that time, including representatives of the public bodies business groups, was that there was a 25% decline. I have no doubt that one could select certain sectors and come up with higher figures but, on balance, across the population, which was defined as SMEs for our purposes, there was a 25% decline. If one took a smaller group of micro businesses, I have no doubt one could come up with percentages such as 50%.

Deputy Chris Andrews

We get many reports and the figures in them in this context would scare one. From what Ms McLoughlin said, clearly, they are not particularly scientifically based.

Ms Dera McLoughlin

To give the Deputy a sense of the some of numbers reported, generically some surveys operate on the basis of tracking loan refusals by company. If a company is ever refused a loan, a "No" is recorded. Our survey is conducted on the basis of recording by loan by company. The detail of it is more granular. If I were to apply for three credit facilities and one was refused, we would note that one was refused out of three. Some of the other surveys would be conducted on the basis that three out of three loan applications were refused on the basis of the company ever being refused a loan application. There is up to 35% margin of error in that respect. It is a significant margin of error. The science, the mathematics and the statistics involved need to be corrected, and that is important.

As Mr. Carr said, our method and our results were presented to the credit supply clearing group, which includes the Department of Finance, the Department of Enterprise, Trade and Innovation, the IBF, Enterprise Ireland, Forfás, the business groups, all the banks, ISME, SFA and Chambers Ireland, and they were accepted as being robust. That is probably all I can say on that one point.

The Deputy asked about oral applications for loans. The banks do not capture such oral inquiries. If one requests a loan on a golf course and then calls into the bank but does not go through a formal application process of completing a form or having one's application processed in a formal fashion through the bank, such a loan application it is not captured. We can only report on the data that are captured. As to whether it would improve matters if such oral applications were captured, it would because it would provide a more complete picture. It is obviously not in our mandate to request the banks to capture more information, but it would improve the picture in this respect.

The Deputy's final question related to loans declined and approved and to the figure of 84% of loans that are approved. It is another gap in the banking systems. If one applies for €1 million and gets €500,000, the €500,000 is recorded on the system, not the €1 million, so the initial application value is not recorded in any system. One could do it on paper but, as there are 30,000 applications, it would be a massive job. To report in a more complete manner, improvements are required in bank systems.

Deputy Chris Andrews

On a follow-up point, and it was an issue to which Mr. Farrell referred, the amount of money drawn down is significantly less than the amount companies are being approved for. We have all heard people saying that they are not getting approved and that they cannot get this, that or the other. The witnesses might expand on why they think this is happening and why people are not spending.

Chairman

It is very clear. If a person applies for €200,000 and gets only €80,000, the person cannot carry out the project he or she wanted. That is the big problem.

Deputy Chris Andrews

They draw down some of the money if not all.

Chairman

They would draw down some. If I want to begin a project for €200,000, and it is stood up and all is——

Deputy Chris Andrews

One will not draw down €20,000 if the project is not going ahead.

Chairman

That is correct.

Deputy Chris Andrews

As I understand it, the person is approved for, say, €1 million and only draws down €500,000. Why is that? If the project does not go ahead, the person would not draw down any money at all.

Chairman

Mr. Farrell will clarify that.

Mr. Pat Farrell

This can also be seen in regard to credit card debt at present. It is because people are risk averse and they are paying down debt as quickly as they can because they are trying to reduce risk. The same applies to SMEs. If one considers one of the figures Ms McLoughlin referred to earlier, she showed that the flowback, namely, the rate at which SMEs pay back the funds they borrow, has reduced from 5.4 years to 5.2 years. Therefore, businesses are paying back on current facilities faster than they need to because they are trying to reduce their debt. This also applies with regard to overdrafts because the overdraft has been approved for a certain amount.

To address the comments made by Deputy Morgan, I have the height of respect for this House and its Members and I hope nobody would think I have ever misled the House, wilfully or otherwise. I would put forward information which, as far as I am concerned, comes from independent third parties. I can only say that the €160 million, the €84 million and the €32 million refers to money that is out there and is deployed across businesses. They are putting it to work at present either as term facilities or as overdrafts across their businesses — that is a fact.

I completely accept that banks have lost huge trust and confidence and I also accept, as I have said in this House and in the media on many occasions, that banks have a lot to answer for in terms of mistakes that were made in the past on lending decisions and so on — that is indisputable. However, we must also ensure that the business of banking is put on a much different footing for the future. This means that credit decisions must be robust and that where companies are suffering a level of distress and do not actually have a viable business, the hard decision has to be that advancing additional credit will not solve the problem. That said, I know there are difficult, hardship cases. I said earlier that within the thousands of decisions which are being made on a daily basis, some are running against customers unfairly and some are running to their advantage.

I asked one of our banks to provide some examples. One example is a technology company which is a late stage start-up and which has been in business for a couple of years. It has just gone back to the bank to borrow €100,000 over four years to restructure its existing facilities and provide an additional €20,000 of working capital. Another company which employs 30 to 40 people in the transport sector has gone back to the bank and has been approved for €80,000 over seven years with a 12-month interest-only period to allow it to restructure existing debt over a longer term and to alleviate cash flow problems. These are real examples, although anonymous, of companies that have been to their bank to renegotiate new facilities because the level of distress they are currently suffering in the business environment has required them to change, and the bank has not been found wanting.

I am sure committee members are coming across examples of cases where the representations received from businesspeople suggests the system is not working for their companies, which I do not dispute. However that is not to say the banks are not dealing with companies where they can and where they believe the business is sustainable over the longer term, albeit with temporary difficulties due to the current environment, and the banks are prepared to work with the companies to restructure their debts and get them over that difficult period.

Deputy Arthur Morgan

What about Enterprise Ireland?

Mr. Pat Farrell

Several meetings with Enterprise Ireland's team and the banks have been facilitated by the IBF and that work is in progress. The knowledge transfer piece is already under way and we are also going out to talk to other international people on the banking side who have more direct experience of lending to these businesses to see what we can learn from them. It has been an ongoing process for the past couple of months and will continue.

Deputy Cyprian Brady

I thank the two contributors for their presentations. On late payments, Mr. Farrell stated 64% of businesses are in positive cash flow and that this is their lifeblood. However, no more than other Members, I have come across cases where the only issue was in regard to the late payments. How does a bank balance the viability of the business against the suitability of the business? It is a constant issue when people find themselves chasing money and cannot service their debts although their long-term viability is not in question.

Deputy Arthur Morgan

It is purely cash flow.

Deputy Cyprian Brady

Exactly. How does the bank balance this against making a decision to refuse? It seems to be a big issue out there. It is a pity the credit review group report has not been published. It might be an idea and would be an interesting exercise to compare the Mazars reports, the IBF's point of view and the review group's position.

Chairman

We will do that in September.

Deputy Cyprian Brady

Finally, in regard to Ms McLoughlin's conclusions around the exchange or availability of information and data, are steps being taken to improve that situation?

Mr. Pat Farrell

When the Deputy talks about late payments, one has to consider what are late payments and what are payments that will never arrive — one is quite different from the other. Sometimes, the later a payment gets, the less likely it will ever pull into the train station. Although I am not a banker per se and I work directly in the banking industry, I know the banks will honestly examine the sector in which the business is trading and will look at the characteristics of the business. As a country, culturally, we are very tolerant of late payments. People take longer in this country to settle their bills than in any other country in the developed world of which I can think, and this is now aggravated and exaggerated due to the current climate. Some of the members present are in business and will know that if one lets a payment run and run, there is less likelihood of it being settled. It then becomes a bad debt, which is a completely different scenario.

The banks will have an intimate knowledge of a business because they will have a relationship with it going back over several years. For example, if a company is heavily exposed in its trading position to, say, the Government or the semi-State sector, and has late payment issues, one can take a view that the payment is late but it will arrive eventually. Therefore, one can take a view in that case about extending additional credit or working capital to that company because one knows the debtors are good for the payment. However, if it is another sector where at present there is a high level of business failure and where the track record is of late payment, translated into no payment, the bank will have to take a view as to whether extending more working capital is the answer because it probably is not. That is the way one has to assess such situations.

Deputy Cyprian Brady

I know individual cases make bad examples. However, in the case of somebody who, for whatever reason, is definitely not going to get paid, why chastise a potentially viable company because of the problems of a supplier or contractor? Is that taken into account when decisions are made?

Mr. Pat Farrell

The immutable law of business is that if one does not get paid for the service one provides, one does not have a business. If a company's customer base is chronically late in terms of payment and there is persistent reneging on debts, there is no case for financing it with additional working capital or any type of term finance because there is no business; the business model is bust. However, where a business is simply suffering a late payment problem because of delayed payments from suppliers — and many suppliers are also experiencing difficulties at their end; it is a vicious cycle — any experienced business banker will not have a problem in recognising that reality and in agreeing to extend, on a short-term basis, the working capital required to tide over the company until it receives payment.

Ms Dera McLoughlin

There was a question in regard to the information sought by banks. In our first report we made eight recommendations in terms of changing or enhancing the information captured by banks. There are undoubtedly gaps in terms of what is currently captured. However, over the course of three reports, we are not aware of efforts to capture additional information. I do not know what the plan is from the perspective of the banks. Mr. Farrell may be able to answer that. We recommended in our first report that the Central Bank should, in the long term, take over the reporting cycle. I understand it is planning to extend its quarterly reporting in respect of two of the nine elements on which we have reported. However, I do not know whether the banks are planning to capture more information.

Mr. Pat Farrell

The Central Bank has held direct discussions with the banks concerned during which it has specified a template of information it wants them to capture. It is my understanding that the Central Bank is beginning the process of collecting that information and will begin, in due course, reporting it on a regular basis.

Deputy Damien English

At a previous meeting I asked Mr. Carr and Ms McLoughlin about the comparison with figures going back to 2007 and 2006. Both reports before us today refer to 2008 and 2009, but those comparisons are not relevant. If €160 billion is currently loaned out to businesses, what was the corresponding figure in the good years? Mr. Carr and Ms McLoughlin said they could not get that information from the banks but perhaps Mr. Farrell might have it.

Chairman

I understand Mr. Farrell gave those figures.

Deputy Damien English

No, I went through the reports and they are not in it. I want a true picture of where we are compared with 2006 or 2007. Many businesses have had their credit facilities in place for three or four years and are now under pressure to make repayments. Does the Irish Banking Federation get to judge the quality of refusals? In other words, does it have an opportunity to form an opinion on whether individual loan applications should have been refused and whether questionable decisions were made?

It has been mentioned that the flow back is higher than normal, but there is relentless pressure on people to make repayments. I accept Mr. Farrell's point that we politicians are likely to encounter only those who are experiencing problems and are not going to hear the good news stories. That is the business we are in. However, the reality remains that we are hearing from people who are under relentless pressure, not only in terms of written correspondence but in the form of telephone calls on a daily basis — morning, noon and evening. There is no reference to that in any report but we know it is going on and is causing unnecessary stress and ill health. It must be stopped. As we all know, it is not possible to get blood from a stone. Mr. Farrell said that professional business bankers understand business and can read a situation well. Is it the case, however, that the banks' best people are dealing with their largest customers while less senior members of staff are left to hound the small guys? If that is the case it must stop because it is another factor, together with Government policy and other issues, that will lead us to lose entrepreneurs, people who will never return to the business world. We must not kill the spirit of business or we will have even greater problems in the future.

If overdrafts are withdrawn or reissued, are they included in the figures twice? I am familiar with cases where overdrafts are being granted two or three times in the one year, which could be bumping up the figures for the amount of finance being granted. Are there implications where the creditor and debtor of a business are both customers of the same bank? For example, if I ask my bank to advance me credit on the basis that I am owed €100,000 by a guy in Galway which I expect to receive within a reasonable period, is the banker likely to refuse that application because he or she is aware that the guy in Galway, who is also a customer of the bank, will be unable to make the payment? Is that a feature of decisions not to extend credit?

Regarding loan guarantees, I accept Mr. Farrell's point that they will not solve everything. However, it is more than two years since this crisis began and no decision has yet been made. From his dealings with the Government, can Mr. Farrell indicate whether there is any chance of progress in this area and what is the reason for the delay? I accept that the new Minister for Finance has a bit more cop on than his predecessor on this issue, but it has been going on too long and people are suffering. Even if a loan guarantee were in place and there were improvements to loan applications such that the banks were willing to approve more of them, is the cash there to finance that? There is an assumption on the part of many people that the bottom line is that the money is simply not there to provide loans. Some clarity in this regard would be helpful.

Mr. Farrell made the point that in general where loan applications are refused there are good reasons for that. However, I have examined the books of people who come to me, looked at correspondence they received from the banks and heard about the telephone calls they are getting. There is no denying that some people are being treated unfairly. I accept that many applications are refused for good reasons, but there is also a high proportion being refused wrongly. Politicians are not making this up; most of us understand business and can read the figures.

In regard to security for overdrafts, asking somebody to put up their house as security for an overdraft of €30,000 is bad practice. I heard a discussion about this on radio recently and the view was expressed that it is legally permissible. I have dealt with people in the last 12 to 18 months who are in this situation of being asked to put up a second property or even the family home as security for overdraft credit. That practice is unacceptable and will not help us get out of the position we are in. It will not encourage growth and we will all end up losers.

In regard to Mr. Farrell's conclusions and recommendations, is there anything he would add to them from a Government policy perspective? I have repeatedly made the point in this and other fora that the owners of small and medium-sized businesses need more professional help and advice. Given that most of them cannot afford to pay for it, the State has a role to provide it. The lucky few receiving assistance from Enterprise Ireland have the benefit of good advice from mentors. Those qualifying through the enterprise boards will also receive useful assistance. For the many others, however, there is no help and no advice. Some of them could trade out of current difficulties if they could avail of such help.

The delegates are in a position to advise the Government to take action in this regard. In the United Kingdom such schemes are referred to as health checks, where management accountants, legal advisers, employment law experts and others are brought in to help people trade out of difficulty, reorganise their business affairs, deal with their creditors, redraw their business plan and so on. I appreciate that some of the banks are trying to do that for people, but they cannot do it for everybody. There is a role for the State in this regard and the recommendations must be put forward at the highest level to ensure it is done sooner rather than later in order to keep people in jobs and keep businesses open.

Mr. Pat Farrell

Mentoring and support may sound like a soft issue but in reality it is critical. That was one of the recommendations in the first Mazars report.

Deputy Damien English

It is not happening.

Mr. Pat Farrell

In terms of the calibre of staff dealing with customers on the front line, there was a criticism levelled at the banks at the start of the crisis that they did not have sufficient grey heads in the business lines dealing with these customers and that communication needed to be improved. The banks have been working to improve their performance in this regard. We have produced a range of information packs for businesses showing them how to make their applications better in terms of the information they provide and so on. All of that is very helpful.

During the years of the so-called Celtic tiger, hundreds of thousands of new businesses were set up. Some of these had fairly thin business models but because of the boom, they could not help but make money. Once the downturn came, however, their business model was not credible. A "Prime Time" programme some time ago referred to the shiny new car showrooms being built on the edge of motorways. It took vast amounts of borrowings for those businesses to begin selling thousands of new cars. People have suddenly figured out that cars can last for seven years or more and in some cases that warranties last that long. They have stopped buying them. Therefore, that business model is not sustainable. If one was to build that type of showroom based on peak sales levels of new cars the market is not there. I appreciate there has been some recovery but the market is simply not there. That is what I meant about reality, there are some things we have to understand cannot be done.

Deputy Damien English

Many businesses can be saved with some professional advice.

Mr. Pat Farrell

In regard to the case at the margin, the couple of examples I quoted where some restructuring has been done, some of the banks have allocated discreet amounts of funds. In one case the banks put 1,600 cases through with that additional funding that possibly would not have stacked up in the normal situation.

The loan guarantee scheme, as I understand it, is actively being looked at by the Department of Enterprise, Trade and Innovation and its agencies. I understand it is being worked through and I anticipate a decision sooner rather than later but I cannot emphatically say that.

Deputy Damien English

Is the cash there to match it? If the loan guarantee comes in, is there cash in the banks to match it?

Mr. Pat Farrell

Absolutely. I am not sure if Deputy English was present at the start of the presentation.

Deputy Damien English

I missed it.

Mr. Pat Farrell

Yes, if one takes the commitments. I want to return to that because it is important to say that banks have been in receipt of substantial taxpayer support, as the Chairman has rightly pointed out but they have obligations, in turn, to the business sector and to home owners and we take those obligations very seriously. On the back of that, in one instance, SMEs, under the commitments of the recapitalised banks, the banks are obliged to make additional €12 billion of funding available over the next couple of years. Banks generally in the sector have committed additional funding as well so that €14 billion to €15 billion is being made available in terms of new credit for the period and that will be needed. As the sector turns the corner, slowly but surely, there will be a pick-up again by SMEs in terms of demand for their products and the more benign environment for exchange rates for exports. Exports are beginning to pick up and they will need access to additional credit. The banks must stand ready to have that credit available where the business is sustainable and where it is viable.

Chairman

It is four months since the Minister for Finance said he would get €3 billion from each of AIB and Bank of Ireland over two years.

Mr. Pat Farrell

Yes.

Chairman

Four months means that a third of the year has gone. I heard the Minster for Enterprise, Trade and Innovation say the other day that issue will be finalised in the next week or two. I have no doubt that the Department of Enterprise, Trade and Innovation wants to bring in a loan guarantee scheme or a credit guarantee scheme of some sort but it is being held up in the Department of Finance. I have said that already so I am not just saying it here now. Where is the €6 billion extra? We were given a guarantee that this was an extra €6 billion. It was a sop to us in the middle of the debate on NAMA and was held out as a way of showing that NAMA would bring some relief to small businesses. Now four months down the line, nothing is happening in that area.

Deputy English is right about small businesses. If I approach the bank for €40,000 or €50,000 and am offered €10,000, €15,000 or €20,000, I will not get involved because I do not have sufficient money to keep the business up and running. Where is the €6 billion for this year, and the €6 billion for next year, that is, €12 billion, to be used? Would it help those 35% distressed loans or overdrafts that are in trouble? Is that not the key area that the €12 billion should help? Some 10% of those may have no chance and even if they won the lotto in the morning they still would not survive. However, as Deputy Morgan said, there are those on the margins who are also laden between survival and failure and all they need is another boost of €10,000 or €25,000. One might ask why put in good money after bad? The rhetorical answer is that a great deal of good money has been put in after a huge belly-full of bad money has been wasted. If it was my money as a taxpayer, I would prefer to go down with a ship helping out a small business than with a massive Titanic ship that sunk small businesses.

Deputy Cyprian Brady

We also must protect the 65% of businesses that are managing to continue. That is the other element on which we should concentrate.

Chairman

We are. The money should be for everybody. I am just saying that if there is trouble why not have some of this money available for distressed loans. I do not know what way this will work. There is a mystery to all of this. If €6 billion is coming from two major banks what is that for? SMEs is a big generic term but what is the money for? Is €2 billion for those who are cycling along and need a boost to go to the next level from, perhaps, four jobs up to seven jobs, because that is where our future lies, along with foreign direct investments, or is there a percentage to help an element of the 35% who are in distress? I appreciate they cannot all be helped. I ask Mr. Farrell to take that message with him whenever he goes to the negotiations.

Mr. Pat Farrell

My understanding is that money is committed by the banks. They have signed up in principle to provide it and the detail is being tweaked. On the question of how it will be used — it will be generally available to enhance the supply of credit that is available to business. As the economy begins to pick up, albeit ever so slowly, businesses start to get new orders and that helps to change the whole construction of things. At the same time, banks need to be ready to finance that level of new business activity so that they can start to get back on an even keel.

Deputy Damien English

I asked a question about the comparative figures for 2006 and 2007.

Mr. Pat Farrell

The figure I have is not specifically for SMEs but it is available from the Central Bank and is shown on slide 2. It shows the total amount of credit to all businesses, including SMEs, and the build up over the period 2003 to 2009. The coloured chart differentiates between loans of up to one year and under five years and over five years. The level of credit in 2009 is lower than the 2008 level and slightly lower than the 2007 level and is close to the 2006 level. Given the way the economy has shrunk in GNP terms it is probably close to or near 2006 levels. While the level of credit generally has shrunk it is fairly well aligned with the fact that there has been a shrinkage generally in the level of economic activity.

Ms Dera McLoughlin

On Deputy English's specific questions, he asked if we had the ability to go in and look at them and take an opinion on them. The answer is "Yes" and we have done it from two sides. We looked at a sample of bank applications and refusals for three of the five banks that participated in the exercise, representing most of the market. Primarily, the reasons, if they could be categorised, would be a significant deterioration in trading performance and, therefore, inability to repay, in accordance with what they were seeking and security. We looked at it also on the demand side and asked customers about their experience. Primarily their reasons for the decline were due to their own deterioration in performance, which they were aware of, because they felt they did not have adequate or proper information to provide to the banks and because they did not have adequate repayment capacity. In some cases, from their perspective, in their sector there was a change in bank lending policy. We did the exercise on both sides and we were able to look at it independently.

Deputy Damien English

Was security an issue?

Ms Dera McLoughlin

Absence of or loan to value levels——

Deputy Damien English

Was it an issue for capital borrowings or for current borrowings?

Ms Dera McLoughlin

We did not look at it in that way. We examined a sample of all products across the banks in question and across different sectors. Therefore, I do not think there was any pattern I can draw out that showed it was different. On the question of overdrafts, essentially the Deputy is asking if overdrafts are included twice. The answer is "No". Essentially, there is a term for an overdraft and it goes up and down and maybe it is used sometimes but not at other times. We included it as an application only in the event that one had to reapply at the end of one's term, rather than mid-term. We were conscious that this was a potential pitfall but we did not fall into it.

Deputy Damien English

Were there other holes Mazars did fall into that we do not know about?

Ms Dera McLoughlin

No. I am just saying we definitely did not fall into that specific one.

Deputy Damien English

There must be some more there.

Chairman

We are glad to see they have their eyes well open.

Ms Dera McLoughlin

We definitely did not fall into it.

Deputy Damien English

That is fine.

Deputy Edward O’Keeffe

I must leave the meeting at some point. I welcome the delegation, including Pat Farrell, who seems to be the spokesperson for banks, and does an excellent job in a very difficult time. We must realise that in spite of everything we hear, the banks are not charitable organisations; they are businesses. The witnesses were talking about overdraft facilities and so on. My experience of banking is that I have borrowed lots of money in my time, and perhaps will again, but I never got what I wanted from the bank. It always cut back from what I said I required because its projections or feasibility studies worked out differently from mine. That is nothing new. Let us get rid of the nonsense of "I went looking for €1 million but I received only €500,000 or €400,000".

We must admit that the world is in the greatest recession we have seen since our grandfathers' time, in the 1930s. Let us be straight about it: we are not out of it yet; Far from it. I have sat around this table for the last 30 years. We built 90,000 houses, or 80,000, and business parks and shopping centres. The Chairman is familiar with my saying this. We had back-to-back investments, and that is why we are landed where we are. We do not have a State bank to take over. We had State banks in the past to rescue people; we had the Fóir Teoranta, the ACC and the ICC. We had other finance organisations dealing with risk capital. They are not there any more. I cannot expect the private sector to come in behind me; it never did.

The banks seem to have increased their margins on the inter-bank rate and are taking advantage of people, although I accept they must make a profit. Overdrafts are not being renewed and loans are being called in. In addition, loans are being reviewed: a loan is agreed for a period of five or ten years, and unless there is a default there is no requirement to rescue it.

SMEs are small businesses similar to mine. They are retail shops such as drapers and restaurants. Those are the areas that have been hit hardest in the worldwide economic crisis, and shutters are going up all over the place. I went to a number of bank managers over the past two or three years for clients. I would like to be realistic in this regard. I went to banks and discovered that repayments had not been made. In the good days, if one did not make repayments one did not get loans or overdraft extensions either. It is about time we faced the real world. Balancing the books was always a big issue with the banks.

Agriculture is a buoyant area of Irish life this year compared to previous years. Great work is being done in processing and agri-business in rural towns. Do the bank representatives have an opinion on this?

Trade is down and we are in a new situation. Security has always been an issue at banks. They would nearly take the wife off you, and if you had a second one they would take her as well. Nothing has changed.

Mr. Pat Farrell

Or one's husband.

Deputy Edward O’Keeffe

Yes, or vice versa.

Chairman

The Deputy is well versed in financial matters, as Mr. Farrell knows.

Mr. Pat Farrell

The European Central Bank regularly publishes as part of its banking stability report the net interest, income and margins for banks across Europe, and Ireland comes close to the bottom of the league in margins. I cannot comment specifically on the margins for SME lending versus mortgages and so on, but I do know that the price at which the banks now source funds has increased considerably. Any day one can pick up the newspaper and see the rates that have been published by the banks for savings; they are well in excess of the DIBOR, LIBOR or EURIBOR rates. Banks are not getting money at the benchmark rates that were traditionally used to determine the cost of funds. The cost of funds today has shifted dramatically, as has the source. Banks must now fall back on retail funds and savers to source the money, for which there is major competition and for which they must pay up. Thus, the cost of funds is reflected in the margins. I do not deny that margins have gone up, but they have gone up because the cost of obtaining the money to lend to people has gone up in equal measure. It is an ill wind that blows nobody any good, because while the borrower may be paying more money, the saver has been a beneficiary.

I will return to the issue of loan reviews in a moment because I want to clarify exactly what was asked. The hardest hit sectors are, as the Deputy said, retailers, restaurants and so on. He mentioned the agricultural sector. I will defer to Ms McLoughlin on that because Mazars did some work on the agricultural sector and as far as I know the witnesses have some detail in that regard.

Ms Dera McLoughlin

Yes; I will have a look at that.

Mr. Pat Farrell

The Deputy mentioned loan reviews. What was his question?

Deputy Edward O’Keeffe

Where a person is — I will not say non-functional in terms of payment, but where there are difficulties in payment — a letter immediately goes out to the constituent or client stating that the loan is being reviewed or called in.

I take issue with Mr. Farrell's statement on interest. European rates are still very low. I am aware there is a so-called State bank in this country paying more for deposit money than the rate at which it lends out money. That is ridiculous. It is in the control of my Government and should be corrected. Mr. Farrell must be aware of this as well. I have been getting complaints, although I have not had one for a few weeks now. One cannot pay more for money, at the end of it. The whole thing is catastrophic. It is diabolical what is going on. There is neither law nor order in it. Irish banks, as I said, are non-functional.

I was here in the Dáil for the last recession. At that time banks rescued the country because they had major profits and had not been reckless in their lending, nor had they been driven to lending. History repeats itself.

Mr. Pat Farrell

I did acknowledge earlier——

Deputy Edward O’Keeffe

History repeats itself. Mr. Farrell need not tell me. We can have all the studies and commissions we like and that is what we will find.

Ms Dera McLoughlin

I will respond to the question on the agricultural sector. Lending to the agricultural sector fell by about 6% between 2008 and 2009. It is currently about €4.1 billion, as compared to €4.4 billion. It is not the most dramatic fall. Lending to other sectors such as construction and hotels, as the Deputy mentioned, has fallen by greater amounts.

Deputy Edward O’Keeffe

What is the reason for the fall in agricultural lending?

Ms Dera McLoughlin

To be honest, I am only reporting the figures as they are in the banks; I am not going behind those figures in terms of agriculture. Less lending is being approved, perhaps. I cannot tell the Deputy——

Deputy Edward O’Keeffe

Are they bank figures?

Ms Dera McLoughlin

This is information I collected from the banks. I went in and pulled out the information. It is bank data but I have analysed it. However, I have not gone under the bonnet and looked at every single agricultural facility; nor have I done this for other sectors.

Mr. Pat Farrell

A general point is that overall — we said this earlier — the amount of credit extended has fallen marginally, so the fall in agricultural lending is pretty much in line with the actual drop in credit generally — as a result, I suppose, of the economic downturn.

Deputy Edward O’Keeffe

Let us be straight about it: banks are practically non-functional. They do not have the money. Let us put our cards on the table. The witnesses should not try to mislead the whole world.

Mr. Pat Farrell

I have already said, although it bears repeating, that €160 billion in credit is being extended to business in general, including €82 billion to the real economy and €33 billion to the SME sector. That money is out there.

Deputy Edward O’Keeffe

And the previous year's figures?

Mr. Pat Farrell

No; right now, this moment——

Deputy Edward O’Keeffe

What has been the increase in borrowing, lending and deposits back and forward in the first six months of this year over last year?

Ms Dera McLoughlin

There has been a 4% drop.

Deputy Edward O’Keeffe

On deposits?

Ms Dera McLoughlin

On lending in general. It would not be deposits so much as loans and overdrafts — the whole gamut of products. It was about 4% down in 2009 compared with 2008.

Deputy Edward O’Keeffe

And what has been the change in margins?

Ms Dera McLoughlin

The margin varies by product, so one would have to look it up by product.

Deputy Edward O’Keeffe

There must be a cumulative figure for interest paid to the banks.

Ms Dera McLoughlin

There is——

Mr. Pat Farrell

The last figure I had was the net interest margin for the banking system across Europe, measured by the ECB. That shows an interest margin of just over 1%.

Deputy Edward O’Keeffe

My view is that we are where we are. If we continue to lend to weak businesses that do not have a future we will have further bankruptcies and liquidations and all sorts of problems. That is the bottom line, Chairman.

Chairman

I am delighted to hear I have one supporter for the strategic investment bank proposed by the Labour Party. I agree with Deputy O'Keeffe. However, in the last recession we had the ICC and the ACC and they helped out significantly. They were far more willing to play ball than some of the current financial institutions. I recall it very well, as an agricultural consultant at the time. In the 1980s I dealt with the ACC and I know exactly what I am talking about.

To survive, businesses need a number of things. They need a product, a market and customers. Without all three they would go out of business very quickly. These three requirements are, in effect, points along the line. Businesses produce their products, get them to the market and get customers to buy them. As Mr. Farrell has said, to facilitate the operation of this system they also need credit. Credit is the line that connects production and distribution to sales and to resources. It sustains businesses through this process from their initial expenditure and raw materials to the receipt of payment from the customers.

That is how the modern economic system works and has worked for the last 100 years or so, even when the barter system was in place. That is why the drying up of credit available to Irish businesses in the past number of years has been significantly disastrous. Viable and profitable companies that are operating successfully are being forced to the wall because they do not have the necessary working capital to sustain them through the business cycle. New enterprises are not able to get off the ground if they do not get access to capital. I mention this because if one point in the cycle is removed, an enterprise cannot progress to the next point and the whole system falls.

Deputy Edward O’Keeffe

Chairman, you miss my point. Adam Smith, the great economist, spoke of the balance of land, labour and capital. Ireland has plenty of land and labour but no capital. We are always in that position. That is the bottom line.

Chairman

As taxpayers, we are putting in a great deal of capital but a line of credit must be established. That is essential for the survival and growth of Irish enterprise and the maintenance of Irish jobs. It is a pity a representative of the Credit Review Office is not here today to assist us in our deliberations. However, I hope its forthcoming quarterly report will indicate that positive measures have been put in place to achieve this objective and, because we operate in a credit driven age, put Irish business back on a sound footing with the adequate financial services it requires.

I thank Mr. Pat Farrell and Mr. Anthony O'Brien, Ms Dera McLoughlin and Mr. Joe Carr for coming here to assist us in our deliberations. Public representatives meet people who have their backs to the wall in many ways and we put forward their cases, which is probably easy for us. However, I thank the witnesses for the forthright way they dealt with each of the issues raised. They did not shirk them. This is not easy. We appreciate the comprehensive way they dealt with them. It is a pity Mr. John Trethowen was not here because his presence would have completed the triangle. We intend, in September, to revisit this matter to see how things are going. I hope, by then, that €3 billion from both of the major banks will be in the system and we will see how things are functioning at that stage.

I call upon the Government to get out of the traps, put credit support agreements in place and bring forward a capital support scheme, as exists in Britain and elsewhere, to help small businesses. If other Governments can do it we should stop shilly-shallying and dilly-dallying and get it done. We cannot blame the banks for everything. Other people must play a positive role to ensure we get Irish businesses moving again and get our people back to work, which is the most important thing.

I thank the witnesses for attending. We appreciate your attendance and forbearance.

The joint committee adjourned at 3.55 p.m. until 2 p.m. on Tuesday, 20 July 2010.