I have sat on both sides of the fence. I am currently an SME and a business owner. I have sanctioned loans and refused loans to businesses and I sat at the other side of the desk asking for loans from banks. One of the businesses I own is Ryan's Food Company in Naas. Yesterday I was dressed in jeans and T-shirt doing my business, but today I look like a banker. It is the persona we have.
As Mr. Gerry Fahy has said, we have looked at this issue for three or four years. We have had some meetings with previous Governments and Government officials and we have had some heated meetings and disagreements. On the record, we said that NAMA alone would not work the free credit in the SME sector. We made a bold statement - we were told we were wrong. Four years later, it is clear that NAMA alone has not freed up credit in the SME sector.
Our background is the reason for setting up an IBC and a specialist entity to supply credit into SMEs, exporters, local businesses and domestic businesses. We believe that up to two years ago the banks had undercapitalised problems and were non-functioning. We now believe the banks have been capitalised but are non-functioning. The reason for this, as Mr. Gerry Fahy said, is the list of objectives. The banks in Ireland have to deleverage by €70 billion; they have to reduce their loan books by €70 billion. Capital allows them have a strong capital base to lend more.
Their issue is funding. In the past three years there was a flight of deposits from the country and there was a flight of deposits from domestic banks. Currently the ratio of loans to customer deposits is somewhere 145% to 165% but that ratio must come down in two years to 122.5%. Simply put, loans must be reduced or deposits increased. In the past three years banks have not increased their deposits. Even though consumer deposits have grown, they are being invested in international institutions where they see their deposits are safer. Corporate investors cannot now place deposits with our pillar banks because their credit ratings are too low. Most corporate treasurers will not place deposits with a bank unless the rating is AA plus. The Irish banks will not be back in that position within a four to six year time-frame. A company such as Glanbia can not place deposits with AIB or Bank of Ireland. No matter how cash rich they become, and we support the company to export, they cannot deal with the Irish banks.
Cash rich companies cannot place deposits with Irish banks. Irish companies that export their products are doing so with the help of city banks and other large American banks. They have a choice of banks at the IFSC and do not need AIB or Bank of Ireland. The SMEs do not have that choice and must deal with domestic banks.
Let me tell members this story. I got an e-mail from my bank this morning on my way here asking me to lodge €75 as I was overdrawn on my business account. I paid it back €3,600 last week and an electricity bill of €2,000 yesterday. I told the bank that the credit cards are in the system, but I was told the money will not be there until tomorrow. To my reply, that it was the bank's system, I was asked to lodge €75 in cash. That does not make me think I can ask for €10,000 next week. That is what we are facing. From the bank's viewpoint, lending to SMEs is risky. It has always been seen as the risky part of banking.
The reason we are in a property bubble is that banks thought property lending was not just more profitable but safer as they had the collateral. The "biz 2 accord" came out and stated that term lending to property against security gives stronger returns on capital. It was all so risk averse. Cash flow lending became very unpopular ten to 15 years ago. ICC bank were very good at it. ACC only just got into it and tried to be good at it. The banks moved away from analysing cash flow to looking at security and the net worth of the customers. The banks wanted to know if a customer had the net worth to carry a bad project. We have all seen, since the collapse of Anglo Irish Bank, that when the whole house of cards started falling, the net worth disappears, the statement of affairs was worth nothing so they cannot pay it back. All the international accountancy bodies - I am not having a dig at my colleague Mr. Gerry Fahy, who is an accountant - thought it was safer lending because it was collateralised and secured.
Cash flow lending is difficult and requires expertise. We also hold that the banks do not have expertise. AIB and Bank of Ireland would have taken the last tranche of what they would have called the old school bankers in 1983 and 1984, that is bankers who would have gone through five years as a junior and five years as an SBO and have done banking and lending exams. After that they went for the yellow pack employees, where people were hired to sell at the front counter. Now in this time of need, the breed who came through in 1984 have probably left, the breed of 1974 are probably retiring, leaving a big vacuum in terms of expertise to analyse credit applications. At a time of greatest risk when SMEs find it harder to make profits, bank staff lack the expertise to match the difficult decisions. It is not a surprise that the banks cannot lend to the SME sector.
We are not here to defend a position, but as experts to propose one. We suggest that the Government has a difficulty in that it should be very careful about giving the banks objectives that are not complementary. We need the banks to deleverage by €70 billion but to lend the SME sector €10 billion in the next three years. One cannot find a more contradictory position. Bank of Ireland has submitted a plan to deleverage by €30 billion. In its plan it has shown growth in deposits in the next three years of €10 billion to €15 billion, after a three year period in which it lost deposits of €10 billion to €15 billion. The best case scenario requires €10 billion to €15 billion in deposit growth from its customers. AIB has no loan assets to sell. For AIB to reduce its loan base it must clear off impaired loans or try to eliminate other loans it does not want. It has to do so by repayments.
Bank of Ireland has probably about €10 billion of assets it can sell in a good market. Of the €70 billion required, at least €55 billion must be achieved by loan paydowns. We have asked ourselves how does a chief executive or a proposed chief executive deal with that? My father used to coach soccer teams, the last thing he would say on the football pitch is spread out and stick together. It is one of those instructions. How does one carry it out? The Government will have the stress of calling the banks pillar banks on radio and television while at the same time kicking them for not lending to SMEs.
Public confidence in the pillar banks does not grow. There is a constant stress between Government and pillar banks. If it was my call, I would ask the banks to go into a corner to fix the mess and rebuild strong entities and then come back into the market to do what they were set up to do in the first place. The Government has invested so much capital in the banks that it believes they should be lending. The banks should be lending but they cannot because the Government cannot bridge the gap of €70 billion on the funding side. That is where the major issue is at present. We have come up with an idea that we first mooted three to four years ago. When this State was in serious trouble back in the 1920s and 1930s it created the ICC and ACC banks. Both played very effective roles in doing advances, equity injections and structured deals to customers that even back then the main banks did not want to touch. Over the years the ACC and ICC gave the banks comfort, so a farmer could go to ACC Bank and get a seasonal loan of €100,000 against grant cheques. That would be then lodged in the AIB account to be drawn down over the year.
The ICC was more technical and did equity injections and bought shares in companies. It acted in a complementary manner to the banks in their main stream banking. As the SME sector has such difficulty getting credit, we believe there is an option to follow a proven successful precedent, which is ICC and, to a lesser extent, ACC.
Our business case is that ten to 12 years ago, there were up to 12 institutions actively involved in the SME lending market in Ireland. When we were coming out of crisis, I came back from the UK in the early 1990s, those 12 banks all shared the burden in increasing lending to the SME and business banking sector. That sector is down to the two pillar banks, Bank of Ireland and AIB Banks with Ulster Bank as the third. At the time we also had a number of specialist players in asset finance, where a SME could get the asset finance for the €500,000 worth of equipment outside the mainstream banking and a specialist company, such as Smurfit Finance, would deal with it. Now those asset finance companies are not doing that same business and most of them have withdrawn from the market. What AIB Banks and Bank of Ireland are doing now is asset financing and calling that SME lending. It is replacing a service provided by somebody else. It is not mainstream cashflow lending to SMEs but asset finance backed against equipment or machinery.
Foreign banks will not fill the gap in the market. We all know that there is no chance that foreign banks will come back in unless somebody brings confidence to the SME sector. The need must be met from an initiative by the people in this room and from the Government to come up with something to deal with a new crisis. Partial guarantees have proven successful before when there is a robust banking system. They are complementary to that banking system. Banking guarantees in place of a banking system begs obvious questions. Who monitors the bank guarantee? If the Government gives a bank guarantee to AIB and it in turn gives a customer €350,000, then €100,000 is guaranteed. When the customer has trouble paying back the €250,00 who monitors that the €100,000 guaranteed portion is not paid back? There are practical issues. Who does the credit assessment on the guarantee? Who wears the risk if the guaranteed portion is not paid back? There are tricky issues around that scheme. We know that the big four firms will come in and do the plans for its introduction but once it is introduced who will manage it?
I will now deal with the critical success factors for the IBC. If the IBC is to work in the format that we are suggesting, it needs an expert and experienced management team. It needs people who have dealt on the ground with SMEs, who can understand cashflow lending and how a business person is thinking and who can fill in the gaps.
Mention was made earlier about the standard of a proposal and the standard of cashflow not being strong enough. We are in banking for years. There are many ways of saying "No". One can say "No" by asking a further ten questions or attaching conditions that one knows the entrepreneur cannot meet. If I have a loan proposal based on a 15 year lease on a restaurant, the bank can say that it will approve my proposal on the basis that I have a 20 year lease, but I cannot satisfy that condition, which, in effect, is a sanction.
One can play with sanctions whatever way one likes. When I was in the ACC Bank the members of the credit risk department there could put statistics to me in any which way. One could then go for a beer with one's business colleagues in The Barge and they would say, "That is bullshit, those are not the facts". Statistics can tell what one wants them to tell. Therefore, there are many way of saying "No".
An entrepreneur may not put forward a proper case for his or her proposal. In the past the old bankers would have helped that entrepreneur and taken him through the proposal. Entities like the IBC can take a client through a proposal, help fill in the gaps and make decisions on robust and viable businesses as against those who put forward the best presentations and have the best advisers.
Another factor is that there must be strong and transparent risk management. We believe that risk management should always be a "4-eyed" principle. The front of house staff assess cases and they are then passed to the risk department which carries out a more objective assessment. There should always be a stress and strain between a front of house banker and the person assessing the risk. That was part of the banking system under which we worked. There should always be that stress and challenge in assessing a case.
During the property bubble many banks disregarded the assessment by the front of house staff and put the property proposals directly into the property department and therefore the "4 eyed" principle was disregarded. The people who were the credit sanctioners were the same people who had the relationship with the clients. The process needs to return to a relationship model backed up by a strong risk and credit model.
Another factor is sectoral and product expertise. As Gerry Fahy said, when he was in banking he had expertise in three sectors. Most of the people we brought in have experience in various sectors. If staff were examining a proposal for a nursing home and considering projected nursing home occupancy levels, they would know if the detail submitted was right or wrong. They would know what the standards are in that sector. That expertise is important. In terms of the staff at an IBC, one would not need a large number of general bankers but people who understand sectors and are able to make a call on a risk.
Another factor is relationship managers with local knowledge. We believe the business must have a local feel to it. Any entity set up must have a local feel to it. If one is dealing with a business proposal in the west, one must have somebody who knows that business, can get local feedback on it as to whether it is as robust as the entrepreneur claims, knows the inside story and can promote the business. Once that person is confident that a loan should be granted, that person can make a strong case on the client's behalf to the risk department.
A further factor is effective and modern technology. One must have correct customer information, correct sectoral analysis information and correct risk portfolio information.
Another factor is flexible and innovative human resources. We cannot pay huge salaries to get people to do these jobs, and nobody is claiming otherwise any more. What is required is flexibility. We need to create a enjoyable atmosphere where the people who would work for an IBC, if one is ever set up, would have a sense of purpose and derive a sense achievement from doing a good job, which would be to provide credit to the SME sector.
Distribution channels for an IBC include nationwide coverage by relationship managers and a presence in cities and some larger towns. We are not talking on the scale of bank branches. When we put forward this model four years ago, we got feedback from somebody whose name I will not mention, who asked how could we set up branches on every street corner. We do not intend to open branches on every street corner. This entity could have a few representative offices in which there would two staff members and they could operate from a first floor premises but they would be locally based and have a local feeling. They could be approached locally.
A further distribution channel is a network of intermediaries including accountants, solicitors and other introducers of business. Another channel is a strong relationship with other business bodies such as county enterprise boards and the ISME to be complementary to the current infrastructure. There are also technology channels.
In terms of product offering, while much of what would be involved was mentioned, the product offering would include medium to long-term tailored loans, credit lines, trade finance, asset finance, deposits and investments and Forex. What the corporation would not do is engage in transaction banking. We are not talking about current accounts, ATMs, laser cards, none of the facilities associated with mainstream banking. The role of the corporation would be to be complementary. We would not propose to issue cheque books but we could provide credit lines by assessing a client's credit rating. If a client had a requirement for €500,000 to buy machinery, that loan request could be sanctioned and the loan could be drawn down into a AIB or Bank of Ireland current account and the client would operate his or her business from it.
In terms of credit management, risk would be an issue. If one sets up a new entity, it will be under the spotlight. Decisions made, declined and approved will be under the spotlight together with the percentage a business has improved or not improved and what has gone bad. We have considered some safeguards in that respect. They include having controlled expansion, to build a business over a four to five year period in tandem with demand, clear policies and sectoral and customer limits. Such limits existed in the past to protect the banks and the State. It might be difficult for people to believe that but banks were limited to a 20% exposure of their loan books to one sector such as property. We all know that was not adhered to. Proper management and controlled sectoral and customer limits are required. Other safeguards are to have in place the "4 eyed" principle, to which I referred, expertise, a management information system and regular reviews of client relationships.
I will ask Gerry Fahy to speak on the funding element.