Credit Guarantee (Amendment) Bill 2015: Second Stage (Resumed)

Question again proposed: "That the Bill be now read a Second Time."

When we last discussed this Bill two weeks ago I was expressing my views on the methods of financing enterprise. There is a macro-problem with the banking market, which is concentrated in too few institutions. The two pillar banks which share approximately 85% of the banking market are effectively an oligopoly. In other words, they exert extremely powerful supplier power, while the buyers in the market, namely, small and medium-sized enterprises and citizens, have extremely weak purchasing power. This market, which is a construct of Government policy, is at the heart of many of the problems in banking. Not only is it proving difficult to direct finance to enterprise, but there are problems with interest rates, mortgage arrears and legacy debt among small businesses. The way in which banks are treating rural branches and their approach to cash handling in small towns are also causing difficulties. Moreover, Bank of Ireland appears to be retreating from dealing with customers face to face. The Government's foremost task, therefore, is to fix these problems.

The Opposition has repeatedly raised the problem of funding for small business, yet even at the eleventh hour in the Government's term, access to credit remains a major problem. Research published recently by the Irish Small and Medium Enterprises Association, the quarterly Bank Watch survey, notes that the loan refusal rate has jumped from 33% to 45%. This means almost half of loan applications are being refused by the banks. Demand for bank credit by small and medium enterprises, at 41%, is still relatively static, and one fifth of all applications are still awaiting decisions. In general terms, the level of credit to small businesses has declined, because the banks are still in the process of deleveraging and many small businesses are still paying down debt. The effect of this is that a cohort of companies, many of which are indigenous businesses, are hamstrung by legacy debt and unable to function properly in the economy.

As the Minister of State is aware, the economy is extremely lopsided in the sense that we have few decent-sized indigenous businesses that are able to export. Of approximately 4,500 exporters in the State, 1,500 are foreign enterprises, meaning only 3,000 indigenous enterprises are exporting their goods. These figures do not compare well to other countries of similar size, such as Austria and Denmark. This structural problem in the enterprise sector can be attributed in part to the structural problems in the banks.

The credit guarantee scheme was designed to provide much-needed finance to job-creating small and medium enterprises that are struggling to obtain credit from banks. It was created to address market failure and the fact that we are revisiting the scheme is an admission that this market failure persists. The market is not providing credit to a sector that requires it.

The purpose of the scheme was to provide credit to viable businesses in two specific circumstances, namely, where a business has insufficient collateral or where it operates in a sector with which the banks are not familiar. In such circumstances, the State would provide a 75% guarantee against losses of qualifying loans. The scheme was intended to benefit 5,400 businesses and create 3,900 new jobs. Neither objective has been realised. Since 2012, approximately €20 million backed by the guarantee has been provided to only 156 businesses.

In his contribution the last time we debated the legislation, the Minister of State, Deputy Gerald Nash, spoke of sanctioned amounts, which are much different from drawn-down amounts. The regional distribution of drawn down amounts shows that the sums involved were paltry and illustrate just how weak this initiative has been. The most recent figures I have seen on the regional breakdown of drawn down amounts indicate that €9.9 million was drawn down in the east region, €2.7 million in the south-west region, €2.4 million in the south-east region, €1.86 million in the midlands, €1.2 million in the west, €800,000 in the north east, and €80,000 in the north west. The entire north west appears to have benefited from only a couple of loans, yet this scheme was designed to be the engine that would get funding back into small and medium enterprises.

When the legislation was introduced in 2012, I recall telling the Minister that the scheme had some merit and could solve some of the problems in the system. However, I also indicated that it was too complex, narrow and expensive and would prove unattractive to banks and customers. Business loans in this State are already more expensive than business loans elsewhere in Europe. Lending by the financial system to small businesses is uncompetitive in European terms. The credit guarantee scheme provided for the addition of a premium to already uncompetitive rates for loans to small and medium-sized businesses. Moreover, the scheme was to be operated through the pillar banks, which are, to some extent, withdrawing from the market and exercising undue supplier power. Another problem with the loan facility provided was that customers could not apply directly to the scheme, as applications had to be processed by the two banks in question.

In the period since the introduction of the credit guarantee scheme, Sinn Féin has repeatedly highlighted other opportunities for resolving the crisis small businesses are experiencing in accessing bank credit. I spent considerable time over the summer developing a model for a public banking system which could be used to direct credit to small businesses and citizens. This was not some radical red effort to remove private enterprise from the equation but one that was based on the network of local banks in Germany, known as Sparkassen, which are a major component of the German banking system. It would add a new dimension in terms of competitive behaviour among the banks and rebalance somewhat the relationship between the banking sector and those it is meant to serve. Our proposal envisaged the establishment of ten new regional banks, managed independently and supported by a centralised specialised unit that would provide auditing, risk management and procurement services to the network. The costs of these elements of banking would be reduced because they would be carried out centrally. Each bank would operate in a defined region, ensuring a balanced distribution of deposits and lending across the State and providing a greater incentive to invest in the sustainable development of a local banking region.

In other words, it would focus money back into the regions because it would be ring-fenced. It would also ensure that the management, staff and expertise of the bank were oriented to the needs of the region. They would get to know the needs of the region and be better able to serve them. What is happening in the general banking system now is quite the opposite. There is a retreat from the regions by the banks.

On Tuesday, we had a finance committee meeting at which representatives of the credit union movement made a presentation. The disconnect between the problems faced by society and the possible solutions was startling. We have a crisis in the property market. Supply is glacial for a number of reasons, a big one being that the relevant enterprise does not have access to funds. We have a serious problem with moneylenders across the State who are preying on low-income families and we have a serious problem with lending to small businesses. On the other side of the equation, we have a credit union sector with €13 billion in assets, which could be used to resolve some of these problems. The sector feels under threat due to the way they are being treated by the Central Bank and Government. They are not being allowed to do more. In other words, there is a break on their evolution to meet the needs of society. There is no doubt that robust regulation is a must. However, the credit union sector should be able to play a full and fruitful role in the lives of the community and should not be pushed to the margins. This is part of the problem. We have a number of stakeholders and an opportunity for public banking. The Government should be oriented towards creating more perfect competition as opposed to an oligopoly within the banking system, but that need is going unanswered.

I ask the Minister of State to deal with the following questions. Does he seek to include crowd-funding facilities within the definition of "lender"? Will all credit facilities be regulated fully by the Central Bank? There are problems with some of the credit facilities dealing with mortgage distress having dual regulation. While the operators in the State are being regulated, those that are located abroad are not subject to regulation. What will the balance of risk be between the State and commercial entities? What charge will be imposed on the new lending model? The original credit guarantee scheme had a role to play and we will not be found wanting in its reform to ensure that there is a significant beneficial effect. I do not want to be sitting here in two or three years having come back to the table with paltry results for the scheme which we must then try to reorient. Let us get it right now instead.

I welcome the Minister of State and his officials. I am grateful for the opportunity to speak on the Credit Guarantee (Amendment) Bill 2015. I warmly welcome the debate as it gives us all a chance to deal with the whole issue of finance and the urgent need to support our SMEs. By support, I mean sensible, practical support and new ideas and proposals to develop the sector, which is already making a huge contribution to Irish society and the economy. I agree strongly with my colleague Deputy Peadar Tóibín on his sensible proposal on a public banking system. It is used in other countries like Germany and it brings an extra dimension to the table. Public banking would be a very significant and positive development. It is something we should look at and listen to carefully. We regularly hear the Government say there are no ideas coming from the Opposition. If it listened carefully, it would hear lots of sensible ideas, some of which we have heard in today's debate.

A commonly cited concern in recent years has centred on the lack of sufficient credit for enterprise. Business largely depends on enterprises with viable futures having access to finance. AIB and Bank of Ireland were committed to providing €12 billion in SME lending over the period April 2010 to April 2012. These two banks were required to sanction lending of at least €3 billion in 2011, €3.5 billion in 2012 and €4 billion in 2013 for new or increased credit facilities for SMEs. Formal lending sanctions were discontinued at the beginning of 2014 but the lending performance of the two pillar banks is monitored by the Credit Review Office on behalf of the Department of Finance. Lending figures for both banks show that at least €11 billion was sanctioned last year, of which 40% was new lending. That is the background to what is going on.

The big issue is the need for focus in developing new strategies and ideas as to how the State is going to support the SME sector. This is central to fostering economic growth and job creation. The Department of Finance has increased the number of economists by just one in four years despite an independent report which highlighted the need to double the number of economists in the Department from 39 to 78. I would like the Minister of State to provide the House with an update on that. There was a total failure to respond to market warnings before the economic collapse. We must ensure that we are prepared for this in future. One in ten of the Department's civil servants is a qualified economist. I highlight this because we are talking about development, finance, guarantees and legislation like the Bill before the House and must ensure the stability of our banking system. We must ensure that our regulatory regime is effective. A further key issue is the sustainability of our public finances. Next year, economic growth rates will be between 4% and 5%, which I welcome. It is important to have a sustainable economy to ensure that resources can be distributed to the people, particularly in the weaker sections of society.

We must ensure that SMEs know what is on offer. I have been amazed at the lack of information out there. In my constituency of Dublin Bay North, which the Minister of State knows is a beautiful place, we gave out in the region of 30,000 leaflets on starting up or expanding a business. We put a number of proposals on that leaflet and got a fantastic response. The biggest response from people on the ground was to say that a lot of people did not know about some of the facilities that are available. We organised a public meeting in the Marine Hotel in Sutton and Independent Senator Feargal Quinn was one of my guest speakers.

I hope the Minister of State was impressed.

I was hoping the Deputy would invite me to address the meeting.

The Minister of State felt a bit left out. Next time, I will ask him to attend as a guest speaker.

I will bring another Minister of State, Deputy Aodhán Ó Ríordáin.

He would be delighted to address my followers. I apologise to the Chair. I am being heckled by the Minister of State. I also brought in Deirdre Smith, the director of the Northside Centre for the Unemployed, who put the unemployed point of view. I listened to the issues raised from the floor that night and many sensible points were made on small matters we could easily address. People emphasised the need for us all to work together and to develop strategies around customer relationships with small businesses. People said small businesses needed to connect with other small businesses in their communities. This social connection is very important in a small country like Ireland. A huge issue that was raised from the floor of the meeting related to local enterprise office grants, and there are also issues around small businesses not being paid on time. These are real problems. Access to finance was also raised as a significant issue. Many people felt excluded and some small business owners said they were being discriminated against. These are important issues. Attendees noted the need to develop an educational system which promotes independent thinking about job creation.

This issue arose under the education heading. There are some progressive schools, but they seem to develop entrepreneurs and creative people with new ideas off their own bat. We need to roll that out nationally. These are the types of suggestion that were made on the floor at the public meeting.

Other sensible points were made, for example, the strong emphasis on the need for everyone to shop locally. Approaching the general election, it is important that the large parties not import printing materials. They must buy locally. If everyone spends €20 extra per week in small businesses, it will generate approximately 20,000 jobs. Deputies need to lead by example and practise what we preach, that is, buy locally and from Irish sources.

Deputy Tóibín mentioned the debate on credit unions and their contribution to society through small to medium-sized enterprises, SMEs. According to the debate over the past two days, there are 2.89 million members of the credit union movement and 342 credit unions are affiliated with the Irish League of Credit Unions, ILCU. I would love to see the Government legislating on the major issue in this regard, that of microcredit, which is lending small amounts to the most vulnerable who would otherwise be pushed into the hands of moneylenders.

Credit unions are interested in making significant amounts of money available to finance social housing from the €8 billion that is currently held in investments. I understand that this idea is on the desk of the Minister, Deputy Kelly. They also want to get involved in lending to small and micro-businesses. It is important that we raise these issues. The movement has included relevant policies in its Six Strategic Steps policy document, which we should read carefully.

The Bill amends the legislation under which the Government's credit guarantee scheme was established in 2012 to address the specific market failures that prevent bank lending to economically viable businesses. It also extends the range of financial products and finance providers to which the scheme applies, seeks to rebalance risks between the State and finance providers and charges a premium for the scheme. These amendments are intended to improve uptake of the scheme among SMEs.

The element dealing with lending to commercially viable businesses is important. We must be sensible because we cannot make the mistakes of the past. People with sensible and viable businesses should be at the top of the pile, as they have the potential to develop and take on extra staff. If every SME took on one or two extra people, it would make a contribution benefiting the more than 200,000 people who are currently unemployed.

We have lost many skilled people in the past five or six years. We must draw them back to Ireland. Emigrants often return with new skills and ideas and radical and creative thinking. This factor should be taken on board.

Broadly speaking, a loan guarantee scheme is a facility whereby banks are able to lend to firms that are otherwise having difficulty qualifying for bank financing due to, for example, a lack of adequate collateral or a poor track record. The loan is guaranteed by the scheme and, in the case of default, the lender recovers its value. Given the proposed amendments, the net cost of supporting €150 million in guaranteed lending per annum will be approximately €18.376 million over the scheme's lifetime.

I welcome this legislation. We must be more creative in developing the SME sector, as it is often forgotten. We need a strong private sector that works closely with a strong and efficient public sector. We will always need a public sector, although there are some in government who do not necessarily share this philosophy. The ideal is to have a mixed, democratic and inclusive economy so that we can generate wealth and distribute it in a fair and balanced way. I hope the Minister of State takes on board some of my ideas.

I thank the Acting Chairman for the opportunity to contribute on this Bill. Providing greater ease of access to credit for SMEs is at the core of this debate. The scheme, which was established three years ago, sought to augment rather than replace conventional access to credit and it is important that the Government continues to review the scheme's operation and makes amendments where necessary.

More than €31 million has been made available through the scheme to date, resulting in the creation of more than 860 jobs and the sustaining of 600 others. However, the scheme has never fully met expectations and a review in 2013 provided some likely explanations for that. Inadequacies highlighted by the review are the subject of this Bill.

A crucial change being brought about by the Bill is the inclusion of non-credit products, such as invoicing, financing, leasing and overdrafts. The scheme's key to success is the fact that the State guarantees 75% of loans while benefitting on a number of fronts from the resultant job creation. Banks must still be prudent, given the fact that only three quarters of a loan is guaranteed by the State, but the scheme allows them in certain situations to provide finance to small and micro businesses that they would not otherwise consider. These are the businesses that will be the cornerstone of any revival in the country's finances. The credit guarantee scheme is just the type of commonsensical measure that is needed to kickstart job creation and ensure that entrepreneurs do not face needless obstacles as they seek to establish fledgling businesses.

Only approximately one quarter of SMEs anticipate that they will seek credit in the next six months, a figure that has remained relatively constant since late 2012. Meanwhile, the number of SMEs seeking credit has declined from 40% three years ago to 32% in the most up-to-date figures. Irish SMEs are more reluctant to borrow than their European counterparts, which is evidence of the depth to which the economy plummeted after the crash. Many SMEs that struggled to repay loans through the worst of the recession will remain shy of lending for many years yet and will only seek loans where investment or expansion will result in gains in the short to medium term. One element that may discourage SMEs from applying for funding is the high rejection rate for loans and overdrafts, which is consistently at more than 15% when the European average is closer to 9%.

The credit guarantee scheme has proven good value for money for the Irish people. The net cost per €100 million of lending is €1.8 million. When one sets this against the direct and indirect taxes collected, employment created and reduced social protection bill, the scheme's benefits become more readily apparent.

Some fledgling businesses will prove non-viable, but many will flourish and grow with proper support and have the potential to make a significant contribution to social and economic life. As a measure in the Action Plan for Jobs, the credit guarantee scheme has worked, but it has not fulfilled its potential. The measures contained in the Bill aim to ensure that the scheme can grow in the coming years and provide much needed money for investment in SMEs.

On 5 November, I moved that the Credit Guarantee (Amendment) Bill 2015 be read a Second Time and I informed the House that I planned to table significant Committee Stage amendments thereto. I emphasise the Government's commitment to making a considerable change to the existing legislation, as was pointed out by the review, namely, strengthening and improving the guarantee in terms of risk spread, extending it to non-traditional, or non-bank, sources of finance and accommodating innovative new provisions. There needs be a role for promotional financial institutions, for example, the Strategic Banking Corporation of Ireland, SBCI, to work with us on enhancing the provision of credit to SMEs. We also need to be able to provide counter-guarantees in such a way as to enable promotional financial institutions to unlock EU finding opportunities, for example, Competitiveness of Enterprises and Small to Medium-sized Enterprises, COSME, Horizon 2020 and the European Fund for Strategic Investment, EFSI.

I listened with interest to the remarks of Deputies Calleary, Tóibín, Finian McGrath and Connaughton and will attempt to address some of those issues now. We will elaborate further on them when we get the opportunity to go through the fine detail via the proposed Committee Stage amendments.

The SBCI is now providing support to non-bank lenders and recently announced an initiative on leasing and hire purchase that will help SMEs. Committee Stage amendments are currently being finalised by my Department, working closely with the Attorney General’s office, the Department of Finance and the SBCI. With regard to the statistics I outlined on 5 November, I have taken note of the requests of Deputies Calleary and Tóibín for drawdown figures. I draw their attention to the regular updates from the operator of the schemes, Capita Asset Services, as published on the website of my Department.

Regarding new products and services, the credit guarantee schemes to follow the enactment of this legislation will collateralise and deal with new markets and products. On the issue of the cost of the scheme, it is important to note that the new and novel approaches being taken do not come cheap. They come at a price and reflect the risk involved. With regard to the return on investment associated with the original schemes, a good return was achieved in terms of job numbers. There were 1,085 new jobs and 618 jobs maintained and consequent social protection savings in many cases. There are increased tax returns to the Exchequer because people are at work.

The Central Bank recently published a paper on the use of personal guarantees in Irish SME lending since 2012, stating that the level of use has fallen. I shall certainly be looking at the evidence as well as other matters covered.

In regard to borrowers whose loans are sold, some progress has been made with new protections in the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015.

On the relaunch and promotion of the schemes, all relevant Ministers, Departments, the SBCI, banks and financial advisers will play an active role in promoting the new facilities available to SMEs. That will be the case right across the country because it is extremely important that we promote the opportunities provided for under the proposed new scheme.

On the legal issues relating to the Bill, credit guarantees and counter-guarantees comprise a very complex area. The drafting has been extremely technical, almost by definition, and there has been a team effort across all relevant Departments and agencies. Admittedly, there have been some difficulties and frustration associated with the implementation but there is an absolute need to get this right, for all the reasons pointed out by colleagues during this debate. There is a need for certainty in matters involving State guarantees, liability and cost and in order to ensure that such State liability has been tied down and is very clear. No country has introduced guarantees without extremely detailed examination and consultation. We need to take great care to ensure EU state aid rules are complied with.

We are talking about his today because of deficits and defects in the original scheme. We were very clear on that and have had the matter reviewed. We have both taken advice and listened. We are taking the necessary steps to ensure we have a robust scheme that works for the SME sector and where the market fails.

Deputy Tóibín referred to competition in the banking sector. We all know why there are only a small number of operators in the Irish banking system. That is exactly why we need diversity in terms of financial products available to SMEs and consumers. It is why the State is stepping in. We sought to improve on the original scheme to support new and innovative approaches and to try to drive an element of competition. This area is constantly under review.

On Deputy Tóibín’s question on the definition of crowd funding, for example, there is no specific definition. However, the scope of the scheme is being extended to cover a broad range of providers. I hope we are clear on that.

Deputy Finian McGrath mentioned a number of issues concerning public awareness of opportunities for access to finance and finance for growth. I remind the Deputy, who, unfortunately, is no longer present, that there is significant information available on I suggest that when he is doing his next leaflet drop or hosting his next public meeting, it might be useful if he provides that information to his constituents, who would be genuinely interested in gaining access to that type of material. The information is also available on the website of the Department of the Taoiseach.

There goes the Minister of State’s invitation.

Indeed. I can whistle for that.

I remind Deputy Finian McGrath that the Microfinance Ireland operation is in place. The performance of that body is improving all the time. It presents a significant opportunity for small and medium enterprises at a micro level to gain access to finance at reasonable rates when they need it, where they need it and in a timely fashion. We have made some substantial changes to the Microfinance Ireland scheme to allow for greater access to microfinance and to allow the system to be more responsible and flexible in meeting the needs of micro-enterprises.

There is an established need for this legislative change. We all accept that. It is in line with best international practise, as identified by the OECD. Our SMEs need this approach. We are improving this and the system will work very favourably in the interest of the SME sector. It will compare very favourably with similar schemes in operation for some time in comparable states across the European Union. I commend the Bill and the proposed Committee Stage amendments to the House.

Question put and agreed to.