Minister Donohoe welcomes Credit Review’s Market Commentary Report

The Minister for Finance Paschal Donohoe today welcomes the publication of the Credit Review: Twenty-third Report, which covers the period 1 January 2023 to 31 December 2024. The report provides a comprehensive overview of Credit Review’s activities, accomplishments, and insights into the credit landscape, highlighting its commitment to transparency, accountability, and promoting fair lending practices for small and medium-sized enterprises (SMEs) and farm businesses.

Among the highlights of Credit Review’s Report are:

Review of lending practices: The report provides an overview of bank lending practices based on Credit Review’s direct interactions with both borrowers and banks during its credit appeals process. The appeals evaluate the availability, and accessibility of credit. Additionally, the report highlights potential issues and opportunities for improvement.

Impact on borrowers: The report highlights the necessity for effective communication with borrowers on the part of lenders. It evaluates the effects of lending practices on businesses and farms, concentrating on issues like repayment capacity, customer support, and transparent lending policies.

Recommendations and insights: Leveraging its expertise and extensive industry knowledge, Credit Review offers valuable recommendations in the report to enhance lending practices and ensure that viable businesses have access to credit. These recommendations aim to promote lending to viable businesses, responsible borrowing, and sustainable economic growth.

From its inception, Credit Review has supported businesses and farms through its appeals process, overturning bank credit refusals. This has resulted in the banks agreeing to provide credit of €82.8 million that otherwise would not have been made available.

On the publication of the 23rd Credit Review Market Commentary Report, the Minister for Finance Paschal Donohoe said:

The publication of the report highlights Credit Review’s role as an independent entity that promotes transparent lending practices and ensures that viable SMEs and farm borrowers can access credit. It serves as a valuable resource for policymakers, financial institutions, regulators, and SMEs, helping them make informed decisions and contribute to a more sustainable credit landscape.

About Credit Review

Credit Review was established by the Minister for Finance in 2010. It is a body under the aegis of the Department of Finance that provides an appeals service for businesses and farm businesses refused credit by banks, together with a helpline and guidance notes on current credit market issues as they arise. Since its establishment in 2010, Credit Review has received 1,425 individual applications for appeals from SME and farm enterprises with 1,014 reaching a final conclusion.

Credit Review’s key role is to examine participating banks’ credit decisions for SME or farm borrowers which have had an application for credit of up to €3 million declined or reduced and who feel that they have a viable business proposition. It acts as an intermediary between the borrower and the banks and makes recommendations to the bank regarding what credit agreement they could extend to the borrower. The lender is not obliged to accept the recommendations of Credit Review, but it must provide a clear explanation if it does not accept them.

Credit Review also provides additional services including regular reporting to department officials on lending trends, meetings with banks and trade bodies, a helpline for SMEs to resolve disputes and publishing informative materials. Their interventions have improved bank practices, ensuring reasons are provided for rejected credit applications, and aiding future borrower efforts.

Background

Credit Review was first established in 2010 by the Minister for Finance to assist the flow of credit to viable Irish business. Its key function is to examine credit decisions for SME or farm borrowers who have had an application for credit of up to €3 million declined or reduced by participating banks (AIB, BOI, PTSB and previously Ulster Bank), and who feel that they have a viable business proposition and apply for a review. While Credit Review cannot instruct a participating institution to provide credit, most of the cases Credit Review has supported were approved credit.

In addition, Credit Review has monitored lending and provides detailed market information to the Minister for Finance and it observes lending behaviour and credit risk appetite by each bank, through its work on borrowers’ appeals.

Credit Review liaises with other government departments, state bodies, and trade bodies in identifying and proposing remedies for market failures in the SME/farm banking landscape and publishes a regular market commentary report.

Credit Review Activity

Since its establishment to date, 1,425 formal applications have been made to Credit Review. 1014 have reached conclusion.

Credit Review has upheld appeals in favour of 597 borrowers, including those with a commitment to reassess the lending in the future, if agreed performance hurdles are met in the short term. A further 45 were withdrawn and approved by the bank.

The upheld appeals have resulted in €82.8 million credit being made available to SMEs and farms, helping to protect/create an estimated 5,000 jobs.

The report and previous reports are available on Credit Review’s website.

Summary of the CRO 2024 Report

SME Overview and Outlook

SME and farm businesses play a crucial role in Ireland’s economic activity, employing almost 69% of the workforce across a wide range of sectors. The Irish economy continued to grow throughout 2023 and 2024 despite the ongoing challenges caused by inflation, climate risks and increasing costs and labour shortages.

SME trading performance has recovered to pre-COVID levels and overall, Irish SME's continue to be resilient. Accommodation and Food and other service sectors in particular highly were exposed to increased wage and energy costs and during 2024 were reporting increasing levels of insolvency and closures albeit from a low base.

Businesses will need to invest to remain competitive, however Irish SMEs traditionally opt to self-finance. The SME sector as a whole appeared to have reasonable levels of cash reserves. Self-financing does come with its own risks and as the pandemic showed, businesses need cash reserves to weather unexpected shocks, so a mix of self-finance and credit finance is most appropriate for sustainable growth. There is also a need for Irish SMEs and farm businesses to focus on green and digital investment.

Despite the growing economy and post pandemic recovery, the bank credit market for SMEs has not grown and continues to contract.

Bank Lending to SME’s Overview and Outlook

According to the most recent Credit Demand Survey, 45% of Irish SMEs have no outstanding debt. The survey also showed that over the last decade, the percentage of SMEs applying for credit has fallen by nearly half, from 35% to 20%. It is the Credit Reviewer’s view that there are two main factors influencing this decline:

firstly, there is contracting level of supply in the market as a result of Ulster Bank (and KBC) vacating the market, together with an expected tightening of risk appetite of banks as per Bank Lending Survey mentioned in Central Bank Financial Stability report of June 2024. SMEs with any form of credit challenge will find it more difficult to access credit from the banks, therefore government schemes such as those provided by the SBCI can help businesses to access bank credit;

the second factor is the credit application process itself, with a recent Ibec report finding that 63% of SMEs still consider the application process to be overly complex and lengthy. An issue identified by Credit Review in the application process is the lack of expertise available to SME and farm applicants not familiar with the process or with poor financial literacy. Automation of the application review process within the banks has restricted borrowers access to expertise of an adviser that would previously have bridged the gap between the knowledge the SME had and what was required.

Another process issue cited has been the communication from the banks. Information on declined applications can be generic and high-level, meaning that the communications received can be of limited value and may not provide a detailed explanation for the decline. It would be worthwhile to consider the provision of an industry standard key information document similar to that provided by the insurance industry.

The length of the application process with the banks is also considered a deterrent by many SMEs and farm businesses to applying for credit. According to the latest Credit Demand Survey 2024, the average time from application to decision with the banks is 24 days. The survey also found that 57% of respondents had a turnaround time of 15 days.

Finally, the availability of alternative options for SME and farm borrowers has led to an estimated 34% of new lending to SMEs coming from non-banks in 2023. Non-bank and fintech lenders advise and advertise that they operate shorter decision times, although as many of these providers are not regulated in the same manner as banks this cannot be quantified. This has, however, been reported anecdotally to the CRO by SMEs and their trade bodies.