I thank Senators for agreeing at short notice to consider this Bill today. Although the Bill is a short and technical one, it is very important to ICC Bank because it will ensure that the current phase of very rapid growth in the bank's activities will not be halted by the existing limits on its borrowings and authorised share capital. The Bill is a reflection on how far the bank has developed since it was first established in 1933 as the Industrial Credit Corporation. However, it is also a testimony to how faithful the bank has remained over all those years to its original mandate.
The ICC was set up with the task of promoting the development of industry in Ireland. This was a daunting task in the under-developed Ireland of the time and it was made doubly difficult by the great depression which was ravaging the world economy. Despite this background, the ICC persevered and made a valuable contribution to the economy, while turning in a consistently profitable performance since its inception. It is a measure of this performance that, despite an injection of less than £12 million in State equity in 64 years, the ICC has today a balance sheet amounting to more than £1,300 million. Moreover, in the past five years alone, it contributed nearly £12 million to the Exchequer in dividends and more than £14 million in tax. Last year operating profits came to £13 million. The Exchequer received £4.5 million of this, roughly divided between tax and dividend payments. Retained profits will strengthen the balance sheet and enhance the value of the State's interest in the company.
In recognition of the ICC's crucial role, successive Ministers for Finance have ensured the legislation governing the ICC has been amended to meet its evolving needs in light of the changing circumstances of the economy. The last such legislation was in 1992 when the name of the company was changed to ICC Bank to underline its commercial nature. That legislation also raised the bank's borrowing limit to £1,300 million, which is one of the subjects of the Bill before this House today.
This Bill is a simple technical one intended to raise the present statutory limits on the bank's borrowing and authorised share capital. It has nothing to do with, nor any implications for, any decision which may be taken in future on the structure of the State banking sector. The Bill is needed now because the bank's rapid growth over the past two years or so is pushing it perilously close to the limit on its borrowing and also to the minimum of subscribed share capital which the Central Bank requires it to have for prudential purposes. On the basis of recent trends, the borrowing limit could be reached around the middle of the year. At that stage, the bank would have to call a halt to new lending and investment if its borrowing limit was not raised. Such a development would hurt the bank and deprive its customers, particularly small and medium-sized enterprises, of its support. In such circumstances, it would be remiss of the Government not to provide for the future expansion of the bank pending a decision on the restructuring of the State banking sector.
I will elaborate on the bank's borrowing and capital needs. As Senators will be aware, borrowing is a vital part of a bank's business. As it applies to banks, the term "borrowing" means the sum total of deposits placed with it, as well as all other forms of borrowing. Thus, when a bank accepts a deposit, it increases its borrowing and its capital base at the same time. It is this which gives the bank the capacity to on-lend to its customers. The more a bank borrows for on-lending, the greater will be the size of its business.
We all know what can happen if a bank develops its business on the basis of risky loans. It is here that the questions of prudence and the quality of loans as assets comes in. Experience has shown that a certain level of bad debts may arise on any loan portfolio. For that reason, bank supervisors and regulators have determined that credit institutions must have a minimum capital to be able to absorb these bad debts. The minimum is set as a percentage of risk-weighted assets. For banks such as ICC Bank, the Central Bank has set a limit of 10 per cent. Shareholders' funds, which consist mainly of subscribed capital and retained earnings, are the basis for determining the capital adequacy of a bank.
In the case of ICC Bank, borrowing at present is just £70 million short of the limit of £1,300 million set out in the 1992 Act. Moreover, the authorised share capital of £12 million is already fully subscribed and other shareholders' funds are almost fully committed. These limits will have to be raised if the bank is to continue to grow and support small and medium-sized enterprises, a sector whose contribution to output and employment in recent years has been crucial.
Lest there be any misunderstanding, I will make two specific points about what the Bill does not provide for. There will not be an increase in the limit on the amount of the bank's borrowing which is guaranteed by the Minister for Finance. The limit on the borrowing so guaranteed stands at £1,000 million, which is the same as it was before the overall borrowing limit was last increased in 1992. This was a deliberate policy at the time to reduce the proportion of the bank's borrowing which carried a State guarantee and it is the firm intention to reduce the absolute amount so guaranteed in the future. The bank's management fully agree with this intention which is in keeping with the bank's commercial mandate.
My second point is that the Bill does not provide for an increase in subscribed share capital. The proposed increase in the authorised share capital is an enabling provision and is completely in line with practice in the private sector where it is common for even small companies to have a large authorised share capital. Consequently, the proposal does not commit the Minister for Finance to any additional subscription of capital. Any such decision will be taken on the basis of a rigorous assessment of the bank's evolving capital needs and of the prospective return it will yield to the Exchequer.
While the proposed increases in the limits on borrowing and authorised share capital may seem sizeable, they are not in reality. In the first place, the increase of £1,000 million to £2,300 million in the borrowing limit will, on the basis of recent trends, only provide for the bank's expansion for the next four to five years. In this context, Senators will note that the last increase in the limit was five years ago in 1992. Four to five years seems to be a reasonable period for which to make provision now for the bank's borrowing needs. I should also mention that, last year, this House agreed to a similar increase from a similar base in the borrowing limit of ACC Bank.
Secondly, the increase in authorised share capital to £40 million has to be judged in the light of the fact that the existing limit of £12 million has been in place since 1971, over 25 years ago. Since then, there have been fundamental changes in the market for financial services, including the intensification of competition, the unprecedented development in the number and variety of financial instruments and services, and tighter capital adequacy requirements. Against that background, and given the particular requirements of a niche bank such as ICC Bank, it is reasonable to provide for an adequate increase in its authorised share capital. However, as I have already stated, and emphasise again, this is an enabling provision and not a commitment to subscribe such capital.
Before addressing details of the Bill, I would like to outline for the House the salient features of the bank's development since the Act of 1992 was passed. As I indicated already, the 1992 Act underlined the bank's commercial nature by changing its name and raising the limit on its borrowing. The Act confirmed that orientation further by enabling the bank to provide all modern banking and financial services, and by making it subject to regulation and supervision by the Central Bank, a provision which also enhanced the international reputation of the bank as a sound, well run financial institution.
Since 1992, the bank has expanded the services it offers while remaining focused on the development of small and medium sized enterprises, a vital sector of our economy. In this, I would mention in particular the bank's venture capital activities. The venture capital market in Ireland has grown rapidly in recent years as successful entrepreneurs became increasingly aware of the benefits which venture capital can bestow on their enterprises. The bank responded to this by establishing a subsidiary, ICC Venture Capital, which manages a number of specialist venture capital funds. Through this, the bank has become the prime venture capital institution in Ireland. It has been particularly successful in attracting investors through the BES scheme. The bank's portfolio of venture capital investments now amounts to £65 million and it has funds of over £42 million available to invest in suitable projects.
In 1993, the bank set up a special deposit taking facility, ICC Investment Bank — ICCIB — to attract deposits without the benefit of a State guarantee. The ICCIB has been very successful in this endeavour, so much so that today its funds account for about 30 per cent of the bank group's overall financing. While the fact that ICCIB is supervised by the Central Bank has contributed to this success, the major factor has been the reputation which the bank has built for itself and its strong balance sheet. Along with the bank's management, I very much welcome the diminishing reliance of the bank on State guarantees, and the continued success of ICCIB in attracting unguaranteed funds will sustain this positive development.
Since last January, the bank also has an operation in the IFSC which provides full asset financing and treasury management for corporate customers with overseas undertakings. In that short time, it has developed a balance sheet of the equivalent of nearly £50 million in a number of foreign currencies.
The bank has been involved in international consulting and training for over ten years through its involvement with, and shareholding in, International Development Ireland Ltd., IDI. To this end, it has built up a core staff with broad expertise in providing management and technical assistance to institutions in developing countries and transitional economies. Following the successful and lucrative sale of IDI earlier this year, the bank made a strategic decision to continue providing international consultancy and training services directly through a subsidiary, ICC Consulting. The expertise of the bank in this area and the reputation it has already made should ensure the continued success of its consultancy arm. The bank has also enlarged its branch network and in 1996 it opened a branch in Belfast, its first outside the State. Excluding head office, the bank now has five branches.
The achievements I have listed are considerable, especially in a context of increasing competition and eroding margins. They have resulted in the bank being a broadly based financial institution providing a wide range of essential services to Irish business. Much of its success in this area can be attributed to its tight control of costs. In this context it is appropriate to mention the exceptional provision of almost £4 million which the bank made in its 1996 accounts to fund a voluntary early retirement and severance packet, internal restructuring and the development of new systems. This is in keeping with the bank's relentless efforts to improve performance and profitability. On the basis of its past performance, I have every confidence the bank will continue on its course of solid, well based development.
I now turn to the main provisions. Section 1 covers definitions and is self explanatory. Section 2 amends section 5 of the ICC Bank Act, 1992, by providing for an increase in the statutory limit on the bank's borrowings from the current level of £1,300 million to £2,300 million. The last increase was in 1992. The increase now proposed is intended to accommodate projected growth in the bank's activities in the coming years.
Section 3 amends section 2 of the Industrial Credit (Amendment) Act, 1971, by providing an increase in the limit on the authorised share capital from the current level of £12 million to £40 million. The last such increase was in 1971 when the limit was increased from £10 million. As indicated earlier, the proposed increase relates to the authorised share capital of the bank and does not commit the Minister for Finance to subscribe all or any of this capital.
Section 4 is a standard provision in Bills of this kind. It requires ICC Bank plc to alter its memorandum and articles of association to make them consistent with the provisions of the Bill.
Section 5 gives the short title, collective citation and construction. I commend this Bill to the House.