Review of Lending to SMEs Final Report March
Transcription
Review of Lending to SMEs Final Report March
Review of Lending to SMEs Final Report March - September 2009 Table of Contents Page Introduction 1 Summary 5 Section 1 Approach Adopted 11 Section 2 Demand for Credit from SME’s 17 Section 3 Supply of Credit 35 Appendices Appendix I 61 Demand Survey Questionnaire Used Appendix II Data Definitions Appendix III Assumptions & Limitations I ntroduction Introduction Background Customer Size In June 2009, Mazars prepared a report on SME Lending (the Mazars This Review was conducted on the basis of companies falling into one Review involving lending to SMEs across five banks. This Review was category, which can be broadly summarised as follows: of three categories of SME, as determined by the EU definition of each Report) which was published by the Department of Finance following a required under the Bank Recapitalisation Programme (February 2009), in order to determine the actual position in relation to the availability of credit to SMEs in Ireland and to recommend appropriate actions to Micro improve credit availability, taking account of the terms of the Credit Small Institutions (Financial Support) Scheme 2008. Medium The current report is being produced as a follow up to the June 2009 Employees Turnover Balance Sheet <=10 <=€2million <=€2million <=50 <=250 <=€10million <=€50million Value <=€10million <=€43million report and seeks to determine the actual position in relation to lending Analysis of the Demand for Credit analysis of both the demand for and supply of credit to SMEs. statistically representative sample of Irish SMEs in October 2009. The examination of demand for credit was conducted in October 2009 questionnaire prepared by Mazars and set out in Appendix I to this examination of the supply of credit was conducted in November2009 MRBI (formerly TNS MRBI) in conjunction with Mazars, and the results This involved an independent and comprehensive study of a to SMEs in Ireland in the period March to September 2009 based on an Individual SMEs were asked a series of questions, based on a focusing on the period March 2009 to September 2009 and the Report. This study was conducted by a third party specialist firm Ipsos focusing on the same 7 month period. of the analysis of the responses provided by SMEs are set out in Scope Analysis of the Supply of Credit Section 2 of this Report. A study of the supply of credit amongst the five banks participating in the Review was conducted by means of a detailed analysis and review The scope of the September 2009 report included the following: of information and data held by each of the five participating banks over the period March to September 2009 as detailed in Section 3 of this Report. 2 Introduction Credit Products • The Review was limited to the following credit products as set out in • Bank of Ireland (BOI) Ulster Bank (UB) the Code of Conduct for Business Lending to Small and Medium • Anglo Irish Bank (Anglo) Enterprises, issued by the Financial Regulator in February 2009: • National Irish Bank (NIB) • • Loans Terms loans (often loans and term loans are grouped together and A number of additional banks have indicated their willingness to are not separately distinguishable) • • • • • participate in future quarterly reports Overdrafts Invoice discounting Data Elements Leasing As in the June 2009 report, this Report includes an analysis of the Hire purchase (often part of leasing). following: Any products that make use of credit insurance e.g. supply line • credit product, not specified in the Code of Conduct, have also • Credit applications been included in the Review. • Approvals/ declines • The initial Review, published in June 2009, also included an analysis of • the following, none of which have been examined in this Review: • • • • Credit policy and its application Overdrafts limits v utilisation Credit quality The following additional data elements have also been introduced in Credit pricing and its application the current Report: Changes in bank lending including terms and conditions of credit, • Drawdowns Flow back of credit security, repayment terms, credit insurance and rates charged • for credit. Reclassification The reasonableness or otherwise of refusals by banks of requests This Report, which covers the period March to September 2009, involved a more in-depth analysis of SME lending by participating Participating Banks banks than that represented in the June 2009 SME Lending Report. The following five banks who participated in the initial Mazars Report (June 2009) are included in the current report: • Exposure Additional information obtained has resulted in the technical reclassification of lending in a small number of instances. This lending Allied Irish Banks (AIB) 3 Introduction had been previously included as SME lending under the terms of this Our work was specific in scope and nature and was based solely on the revisions in both the product category and sectoral exposure figures. of a data return by the five banks who participated in the Review, Review and has been reclassified in this Report. This has led to review of information and analysis of data provided to us in the form The overall impact has been to restate the value of lending to SMEs by together with an independent study we conducted of the demand for some €818.5 million but overall trends in lending in this and the credit. earlier report are unaffected. We have relied on assurances provided by individual banks as to the Future Quarterly Returns completeness and accuracy of the data and information provided to The 5 participating banks in conjunction with Mazars and the Irish individual banks without having sought to validate these with us. Furthermore, we have relied on explanations given to us by independent sources in all cases. Banking Federation have agreed to report on lending to SMEs on a quarterly basis. The basis of this reporting will be similar to the information presented in this Report, and over time, and if it is Mazars assumes no responsibility in respect of, or, arising out of, or in possible to do so, may also include additional information on credit connection with this document. supply, interest rates and conditions. In addition it is proposed that an additional number of banks will participate in future Reviews Mazars December 2009 4 S ummary Summary The following is a summary of the main points arising from the Review of lending to SME’s, covering the period March 2009 – September 2009: Similar to the June Review, this Review was conducted in two parts; an examination of the demand for credit amongst SMEs, conducted by means of a comprehensive survey of Irish SMEs across all sizes of company and sectors in the economy and an examination of the supply of credit by the banks, conducted by means of the analysis of a data return provided by the five banks who participated in the Review, and some limited testing of internal bank credit systems and data returned. The examination of demand for credit was conducted in October 2009 focusing on the period March 2009 to September 2009 and the examination of the supply of credit was conducted in November 2009 focusing on the same 7 month period. Demand Side Highlights 46% of survey respondents made one or more requests for credit in the 7 months to September 2009, representing a reduction in the demand for credit in the period of approximately 6 percentage points when compared to the previous demand survey included in the June 2009 SME Lending Report. Of those requests for credit 79% of applicants made a formal request (defined as filling out formal application form which is assessed internally by the bank). Only 11% of respondents indicated that they had requested or applied for a form of non bank finance The most common reasons for requests for new credit, amongst demand survey respondents, were for working capital/cash flow reasons, to address declines in business revenues and to support a slowdown in debtor collection. The most requested products were loans, followed by increased overdrafts, leasing/hire purchase products and new overdrafts 6 Summary Survey responses indicated that SMEs continue to operate in difficult trading conditions in the 7 months to September 2009. 78% of respondents reported a continued decrease in turnover with 45% experiencing a decrease in turnover of 20% or more. A levelling off in the rate of decline in employee numbers is apparent in the 7 months covered by this Report. The most common reasons for decline cited by respondents to the demand survey were ‘change in bank lending policy’ as was the case in the June 2009 demand survey, however it is important to note that on this occasion ‘decline in business performance’ was now recognised by applicants as one of the main reasons behind the decline of an application for credit (16%), this represents a substantial movement in the 7 months to September 2009. Of those who were successful in their request for credit 13% did not (either wholly on in part) avail of those facilities, primarily to the fact they did not need it at that time. Supply Side Highlights Total lending to the SME sector, as ascertained by the supply side review, has decreased from €33.6 billion in February 2009 to €32.7 billion in September 2009 or by 2.6%. Total SME lending excludes lending to development and speculative construction, speculative real estate and certain other non relevant subsector as outlined in Section 3 below. The number of formal applications for credit received by the participating banks continued to decrease in the current review period. In the prior period the volume of formal applications decreased by 11%. In the current period the volume decreased by a further 23%. In value terms formal applications received by the participating banks decreased by 42% in the prior review period, followed by a decrease of 27% in the current review period. This indicates that participating banks are experiencing a continued decrease in demand for new credit 7 Summary The quality of the SME loan book as measured by bank credit grading systems deteriorated significantly in the period under review. In June 2008 15% of lending (in value terms) was contained in the ‘Watchlist’ or ‘Impaired’ categories i.e. customers who are operating in excess of their repayment obligations. In February 2009 the percentage had increased to 22% and by September 2009 it had increased further to 32%. This indicates that at September 2009 approximately one third of total SME customers represented by participating banks are operating in excess of their repayment obligations. A review of the average utilisation of approved overdraft limits across the participating banks shows that 48% (or €2.6 billion) of approved overdraft limits were on average unutilised throughout the period to September 2009. In the prior review period on average 51% (or €3 billion) of approved overdraft limits were unutilised. In the period March 2009 to September 2009, an amount of €2.6 billion was drawn down by customers of the participating banks against approved Loan and Finance & Leasing facilities. This is the first period for which we are reporting on drawdowns and as such no comparison is available. The average flowback rate for the seven month period covered by this Review was 10.7%. This equates to an annual flowback rate of 18.3%. At this rate, the repayment term for total lending to SMEs would be almost 5.5 years. This varies substantially amongst individual participating banks. Flowback is being reported from the perspective of Loans and Finance & Leasing only (as Overdrafts and Invoice Discounting products whereby customers operate on a limit basis do not lend themselves to this type of analysis) 8 Summary Decline Rate Analysis The decline rate associated with SME lending can be examined from two distinct perspectives: • • The demand side – i.e. the decline rate derived from an analysis of responses to a customer survey conducts as part of this Review The supply side – i.e. the decline rate derived from an analysis of data supplied by participating banks A significant difference is apparent between both decline rates. Demand Side The rate of decline of applications for credit reported by SMEs (based on the demand survey) was 28% across all requests, an increase of approximately 4 percentage points on the June 2009 survey. The decline rate across banks representing the significant majority of applications varied with a range of 17% to 30% with the remainder outside that range. Micro companies reported the highest level of decline at 31%. It should also be noted that the decline rate on requests for non bank finance was 31% It is likely that some level of overstatement is inherent in the demand decline rate, however given the fact that only two such surveys have been conducted to date, and as such significantly less data exists than on the supply side, it is not possible to quantify the extent of that overstatement as of yet. Supply Side If the decline rate is calculated using a consistent approach, to that used in the June 2009 report, and on the basis of the data currently held in the participating banks systems, a rate of 13.6% is apparent (14% June 2009 Report). This represents a difference of some 14 percentage points between the decline rate reported by customers based on the demand survey and the decline rate recorded by banks based on the data currently held in their systems (supply side) 9 Summary Comparative Analysis The difference in the demand and supply decline rates would primarily appear to arise as a result of • • • • • A difference in perception as to what constitutes an application for credit amongst customers and banks Differences in when and how credit applications are recorded on participating banks’ systems Certain limitations associated with the use of telephone surveys such as those used on the demand side The fact that informal requests for credit or enquiries are not in all cases recorded by participating banks The fact that processes used in participating banks for the recording of credit applications and declines are not the same across all banks. However the processes used by each bank are consistent with those they used in the period covered by the June 2009 SME Lending report. • The fact that the demand survey is based on all banks participating in the Irish market, whereas on the supply side, the data is based on the five banks participating in this Review only, although this is not likely to have a material effect on the decline rate On the basis of these differences and following our analysis of bank records, it is our opinion that the impact of these limitations in bank systems and processes is to understate the overall supply side decline rate. As such and in order to address this difference, we have performed an additional level of work in order to determine the quantum of this understatement. This work involved: • • • The analysis of the variances in the range of credit decline rates across application classes and sectors An assessment of the impact of the adjustment of decline rates for anomalies apparent in data received The reworking of credit application and decline rates based on this analysis for a portion of credit applications On the basis of the additional work which we have performed, and given the limitations inherent in bank systems and processes as outlined above, it is our opinion that a decline rate of approximately 18 % in this and the prior period may be more representative. The participating banks are attempting to address the limitations in their credit application systems and processes and we understand will do so over time. However it is unlikely that it will be possible to ever completely address the limitations associated with credit application processes and systems and in particular to fully record informal requests for credit. This is outlined further in Section 3 below. 10 1 Approach Adopted Approach Adopted This review of SME lending was conducted as a follow on exercise to demand survey was conducted by a third party specialist firm – Ipsos the review conducted in June 2009 which sought to determine the MRBI (formerly TNS MRBI) in the period October 2009. actual position in relation to the availability of credit to SMEs in Ireland and to recommend appropriate actions to improve credit availability, The requirement to conduct a separate demand study was based on Support) Scheme 2008. on the following specific limitations: taking account of the terms of the Credit Institutions (Financial our assessment of the data captured or held by individual banks and This review, as its predecessor was conducted in two distinct parts as • follows: • requests for credit are generally not maintained by the banks. We have been able to analyse formal credit details or applications that Review of demand for credit from SMEs: this was conducted by are entered on to the credit systems of the participating banks only means of an independent and comprehensive study of a large sample of Irish SMEs in October 2009 as detailed in Section 2 of • Whilst there are some limited exceptions, records of enquiries or • It would appear in most cases that enquiries for credit from SMEs this Report are initially assessed informally by the relationship, lending or Review of supply of credit: this was conducted by means of the as to the merits or otherwise of the credit proposal. Using their detailed analysis and review of information provided branch manager in each bank. These managers form an initial view by experience of the lending process and the client’s background, the participating banks in the form of a data return and the manager responsible advises as to whether the enquiry is suitable subsequent analysis and testing of this data where possible. The to proceed to formal application stage data return was prepared on the basis of the period March to September 2009 as detailed in Section 3 of this Report. • As such formal applications for credit cannot be considered as a comprehensive estimate of full demand for credit. In order to address these deficiencies, the survey assessed the demand 1.1 Review of Demand for Credit for credit from Irish SMEs across all products and sectors included in scope of the Review. The survey was conducted on the basis of 6,220 In order to address the limitations associated with credit demand discrete telephone calls made to individual companies categorised as information available through individual bank systems, a separate SMEs. 1,052 completed questionnaires resulted from these phone calls. 12 Approach Adopted A number of calls were made to individual SMEs to ensure that the The data elements provided in data return were as follows: only 403 refusals to participate in the study and only 114 quota fails • correct person completed each part of the questionnaire. There were (i.e. where companies took part but could not qualify for the survey Exposure - the volume and value of credit activity with SMEs as represented by the level of credit extended to SMEs and across because the quota for the sector in which they were trading had sectors and products (i.e. outstanding credit) already been reached). • The data arising from this survey was reviewed and in turn analysed by New Credit Applications - the level and value of formal application for new/increased credit across products and sectors Mazars, the results of this analysis and the detailed technical approach to the survey, are set out in Section 2 of this Report. • Approvals and Declines – the level and value of positive and negative responses to requests for credit across the sector as a whole and individual product and sectoral groupings 1.2 Review of Supply of Credit • Drawdowns – the value that customers have drawn against approved credit limits in the period of the Review (loans and Our review of the supply of credit to SMEs is based on the analysis of finance and leasing only) the data submitted by each individual bank in the form of a data return, covering the period March to September 2009. • Overdraft Utilisation Levels – the extent to which approved overdrafts limits have been used by customers In the case of most of the participating banks, this return was then reviewed by Mazars on site, to determine the consistency of the • methodology used in the collation and presentation of the data Flowback – the percentage of total lending which is being repaid on an ongoing basis is referred to as Flowback. (loans and finance returned where possible. Our review incorporated a limited analysis of and leasing only) data held by the individual banks in their lending and credit systems together with some high level testing. Data analysis and testing was • not however possible in the case of all participating banks or in the Credit Quality – the value of individual customers whose accounts have been classified as performing, watchlist (i.e. accounts which case of all the categories of lending data provided are 30 to 90 days in excess of their repayment obligations) or impaired (accounts which are more than 90 days in excess of their repayment obligations) 13 Approach Adopted Limitations • Applications for loans and overdrafts which represent approximately 85% of total applications cannot be split in most Our review incorporated the analysis of data held by individual banks banks, and as such our analysis has required us to consider both encountered in the analysis of lending to SMEs and the assumptions reliance by SMEs on overdrafts as a form of working capital finance in their lending and credit systems. The detailed as one credit facility. This is of particular importance given the limitations which we were required to make are set out in Appendix III to this • Report. The principal limitations are as follows: • • systems, it is not possible to analyse formal applications fully. We Records of enquiries for credit are generally not maintained by could not split applications received by the banks into those review period, we were unable to secure any meaningful analysis customers. Therefore we have been obliged to conduct our the banks. This is changing at present in some banks, but for the received from new customers and those received from existing of credit enquiries analysis on a total new applications basis • It would appear in most cases that enquiries for credit from SMEs branch manager in each bank. These managers form an initial view • as to the merits or otherwise of the credit proposal. Using their It is not possible to comment on trends in credit applications experience of the lending process and the client’s background, the arising from renewals and amendments to existing loan and to proceed to formal application stage identifiable in most banks. Our analysis of loans and overdrafts is In some cases credit applications are not recorded in full on from existing and new customers overdraft facilities due to the fact that they are not separately manager responsible advises as to whether the enquiry is suitable therefore focused on applications for new and increased credit systems until such time as a lending decision has been made • Only paper based systems were in place for some products in certain banks during the period of the Review are initially assessed informally by the relationship, lending or • Due to limitations in individual bank lending and application • Each of the systems in place within the banks, which support In a small number of cases, and for certain products, where a lending to SMEs is very different and operates on a bank specific both the existing and the new credit are included as credit collected in an easily comparable manner basis only. The information contained within the systems are not customer applies for a top up on an existing facility, the value of applications and cannot be separately identified 14 Approach Adopted • It is not always possible to analyse lending on a product by product The participating banks are attempting to address these limitations basis in all banks as applications for certain products are not and have committed to doing so over time. However we understand separately coded in back office systems • that this may take a considerable period of time and it may never be possible to fully address the limitations associated with the recording In the case of some banks, different systems are used in the same of bank, depending on the type or size of the credit facility in particularly the recording of informal including the following: within that bank • The absence of informal application/ enquiry recording systems and business processes in most banks Data and data models in place across the five banks included in the • Review are very different and in many cases data models are not • comparable The relationship driven nature of informal requests for credit Lack of clarity and consistency across banks as to what represents an informal credit application or enquiry • • applications applications for credit or enquiries due to a number of factors question and these systems are not consistently structured even • credit Individual banks do not capture customer trading data in a manner The fact that informal requests for credit or enquiries are often general rather than specific in nature and may not be fully that allows us to perform our analysis by SME category – i.e. small, quantifiable in value terms medium, micro. Therefore all of the analysis set out in this section is based on a single category of SME companies only as Sectoral Analysis represented by those companies who satisfy the EU definition of an SME. In order to ensure that data held by individual bank systems in accordance with their own data models and classification rules was These differences in systems, lending processes and data models have comparable and could be collated to form a sectoral picture, we have impacted on our ability to present a detailed consolidated picture of used Central Bank sectoral codes. lending to SMEs across the banking sector in Ireland as represented by the five banks included in this Review. We do however believe that the • final overall picture and the information presented in this Report is Central Bank sectoral codes are those codes used by the Central Bank, and specified at EU level, under which individual banks materially correct and presents a clear and, in so far as it is possible, accurate picture of SME lending by the five banks participating in the Review and thus the substantial proportion of credit extended to SMEs operating in the Irish market 15 Approach Adopted submit their quarterly returns to that Organisation. These codes are based on NACE Rev. 1 • o codes1 o The demand study has used standard NACE codes. The NACE Code system is a pan-European classification system which groups Charities o Government (central and other) o unique 5 or 6 digit code to each industry sector e.g. B - Mining and Churches and religious organisations o o organisations according to their business activities. It assigns a Hospitals Extra-territorial organisations and bodies Private household lending. Quarrying - B5 - Mining of Coal and Lignite • Customer Analysis In order to ensure that the results are representative of the overall SME population, the construction sector in so far as property This Review was conducted on the basis of companies falling into one development and speculative activities are concerned has been of three categories of SME, as determined by the EU definition of each excluded. Only companies who support or supply to the category, which is set out in the Introduction to this document. construction sector have been included • The specific sectors or subsectors excluded from the analysis are set out in detail in Section 3 and are: o Non SME related financial intermediaries: non-bank credit grantors, credit unions, collective investment schemes, SPVs asset-backed securities, pension funds o o o 1 Speculative real estate activities Speculative construction activities Educations – schools and colleges NACE Rev. 1 ("Nomenclature statistique des Activités économiques dans la Communauté Européenne") was adopted in order to establish a common statistical classification of economic activities within the European Community in order to ensure comparability between national and community classifications and national and community statistics. 16 2 Demand for Credit from SMEs Demand for Credit Section 2 Demand for Credit The following is a summary of the main points arising from the demand survey conducted as part of the Review of lending to SME’s, covering the period March 2009 – September 2009 and as compared to the period of the previous review – i.e. June 2008 to February 2009 (The June SME Lending Report): Highlights • The demand survey: The demand survey represents a study of lending to SMEs conducted in Ireland examining the issue of credit availability. It was carried out by a third party specialist firm Ipsos MRBI (formerly TNS mrbi) in conjunction with Mazars. A sample of SMEs were contacted and asked to respond to a phone based questionnaire. This sample was selected from a database of over 122,000 companies. The survey was carried out in October 2009 and respondents were asked to respond based on their experience in the previous 7 months • Respondents: The demand survey analysed the responses of 1,052 SMEs. The responses can be considered to be representative of the population of SMEs and the sample is statistically representative across all sectors in the economy and across small, medium and micro SME organisations. The profile of respondents is similar to that in the previous Review • Trading conditions: Survey responses indicate that SMEs continued to operate in difficult trading conditions in the 7 months to September 2009. 78% of respondents reported a continued decrease in turnover with 45% experiencing a decrease in turnover of 20% or more. A levelling off in the rate of decline in employee numbers is apparent in the 7 months covered by this Report. • Volume of demand: 46% of survey respondents made one or more requests for credit during the period of the Review, representing a reduction in the demand for credit in the period of approximately 6 percentage points when compared to the previous demand survey included in the June SME Lending Review. Of those requests for credit 79% of applicants made a formal request (where a customer fills out a formal application form). Only 11% of respondents indicated that they had requested or applied for a non bank form of finance • Professional Support: Some 50% of SMEs sought professional advice from auditors, accountants and other professionals) regarding ther financing requirements 18 Demand for Credit • Nature of demand: The most common reasons for requests for new credit, amongst demand survey respondents, were for working capital/cash flow reasons, to address declines in business revenues and to support a slowdown in debtor collection. The most requested products were loans, followed by increased overdrafts, leasing/hire purchase products and new overdrafts. • Seasonal nature of demand: Whilst 43% of companies indicated that trading activity was seasonal in nature, only 24% of respondents indicated that their demand for credit was seasonal, with quarters 1 and 4 and specifically the months January and December demonstrating the highest levels of demand for credit • Decline rate: The rate of decline of applications for credit reported by SMEs (based on the demand survey) was 28% across all requests, an increase of approximately 4 percentage points on the June 2009 survey. The decline rate across banks representing the significant majority of applications varied with a range of 17% to 30% with the remainder outside that range. Micro companies reported the highest level of decline at 31%. It should also be noted that the decline rate on requests for non bank finance was 31% • Reasons for decline: The most common reasons for decline cited by respondents were ‘Change in bank lending policy’ as was the case in the June demand survey, however it is important to note that on this occasion ‘decline in business performance’ was now recognised by applicants as one of the main reasons behind the decline of an application for credit (16%), this represents a substantial movement in the 7 months to September 2009 • Drawdown of approved facilities: 13% of respondents whose requests for credit were approved did not (either wholly or in part) avail of the facilities. The main reasons cited were ‘Not needed at present’ and ‘Cost too high/risk’. This compares to a figure of 14% in the previous period • SMEs exporting: 17% of respondents indicated that in the last 12 months their business exported goods or services outside of the Republic of Ireland with a total value greater than €100,000 • Computer software/hardware industry: 8% of respondents indicated that their businesses develop, sell or implement software and /or hardware. 19 Demand for Credit Approach and Overview Demand for Credit Methodology Adopted captured in any systematic fashion by either the banks or by any outlined above, a comprehensive survey of Irish SMEs was conducted key objective of this Review, it was considered necessary to in the June 2009 SME Lending Review. This independent demand study levels, demand factors and experiences. This section sets out the specialist firm. Both the size and sectoral profile of target respondents The full demand for credit by SMEs is currently not comprehensively To satisfy the Review objectives and address the practical constraints statistical or regulatory body. As the examination of demand was a using the same methodology and minimum sample targets as employed commission an independent demand survey to capture demand was conducted by means of a telephone survey by a third party key findings of that survey. was consistent with that employed in the original profile in June 2009 Current practical constraints in relation to the availability of demand ensure that trends and patterns could be established. Review, in order to establish a like for like comparison of results and information include: • About The Independent Demand Survey Records of enquiries for credit are generally not maintained by • by the individual banks, and in an effort to build on previous the banks. This is changing at present in some banks, but for surveys conducted and to comprehensively assess the demand for the review period, we were unable to secure any meaningful credit amongst Irish SMEs across all sectors of the economy, an analysis of credit enquiries • In response to the deficiencies in credit demand information held independent survey was conducted by Mazars In most cases, preliminary enquiries for credit are assessed informally by the relationship, lending or branch manager in • The independent demand survey involved the support of a third party specialist firm, Ipsos MRBI. each bank. These managers assess the merits or otherwise of the credit proposal and advises as to whether the enquiry is suitable to proceed to formal application stage. As such formal • Ipsos MRBI conducted a telephone interview based survey using a questionnaire applications for credit cannot be considered as a complete designed by Mazars with input from the Departments of Finance and Enterprise, Trade and Employment, as picture of the full demand for credit. well as the Irish Banking Federation 20 Demand for Credit • The survey sample was derived from an Ipsos MRBI • recommended database, which is compiled from multiple The survey also included the Agriculture, Hunting and Forestry sector. This sector may not always have been included in previous sources and updated regularly. At the date of writing, the SME credit surveys but does nonetheless represent an important database held over 122,000 records. The total universe of constituency of Irish SMEs. 30 respondents in this sector have been records within the scope of this Review and from which the included in the final demand study sample was selected was approximately 99,000 SMEs • • 6,220 calls were made in the course of the survey. A number of practice in statistical sampling. Minimum sample targets were set calls were made to individual SMEs to ensure that the correct to ensure that the sample was sufficiently representative of the SME person completed each part of the questionnaire. In many cases, population in terms of both SME size (micro, small and medium) a number of conversations were held to complete the suite of and sector (as defined by NACE codes) questions. There were 403 refusals to participate in the study and only 114 quota fails (i.e. where companies took part but • could not qualify for the survey because the quotas for the the survey can be considered to be robust and statistically The full survey questionnaire is attached as Appendix I to this report representative of the Irish SME population across all sectors of and detailed results are presented below. the economy Completed questionnaires based on a telephone interview were compiled by Ipsos MRBI for 1,052 Irish SMEs and provided to Mazars for review and analysis • The survey also addressed the topic of seasonality and the extent of export activity in which each firm was engaged. sector in which they were trading were already reached). As such • The selection of the sample was conducted in accordance with best The survey assessed demand for credit from Irish SMEs across all products within the scope of the Review and all business sectors using standard NACE sectoral codes. Demand was assessed for the seven month period from March 2009 to September 2009. The survey was conducted in October 2009 21 Demand for Credit Demand Survey Results 2.1 Profile of Respondents This section summarises the results of the demand survey as follows: compiled by Ipsos MRBI for 1,052 Irish SMEs. • Profile of respondents (including length of time in business, trading performance, relationship with banks membership of business representative organisations) • Completed questionnaires based on a telephone interview were and Length of Time in Business There was no real movement in the length of time of respondents had Requests for credit (including level of demand, nature and been in business compared to the prior June 2009 survey. seasonality of demand) • • Approvals and declines 73% of respondents had been in business for 11 years or more (June Drawdown of approved facilities 2009: 72%) The results of our analysis of the demand survey in this Section are Graph 1: Customer Profile by Length of Time in Business presented for all banks, rather than just the five participating banks. 60% Percentage of Respondents Time Period of Survey In reviewing results it should be noted that the time period of the June 2009 survey was 12 months whilst the current survey referred to the 7 month period from March to September 2009. Seasonality may have an impact on the results of the survey. 40% 20% 0% Up to 2 years Between 2 and Between 5 and Between 11 and More than 20 4 years 10 years 20 years years 22 Demand for Credit SME Category However, it should be noted that the basis of the survey was to collect SME Category: To ensure a suitable comparison with the prior survey, nature of the sector, companies in certain sectors would not be involved information across a targeted sectoral profile, and by virtue of the the survey included the same representative profile of micro, small in the export trade. Participants who indicated that they were involved in should be noted that the actual profile of the SME sector contains a manufacturing sector (processing & food, high tech and other and medium companies across each business sector. However, it the export of goods and services were primarily based in the higher proportion of micro and small SMEs. manufacturing) 2.2 Trading Performance Graph 2: Respondent Profile by Size of Business June 2009 September 2009 Turnover: SMEs are continuing to experience trading difficulties - 78% of respondents indicated that they reported a decrease in turnover in the 7 30% 35% 30% months to September 2009 –74% of SMEs indicated a decrease in the 12 35% months to June 2009. Almost 45% of respondents indicated that Micro turnover had decreased by more than 20%, as was the case in the June Small Medium 35% 2009 Report. Micro and small companies reported greater levels of decrease in turnover of more than 20% that their medium counterparts. Graph 3: Respondent Profile by Movement in Turnover 35% June 2009 Computer Software/Hardware Industry: 8% of respondents 10% 16% participating in the survey were involved in the development, selling September 2009 7% 15% or implementation of hardware or software for the computer Increased industry. Decreased Remained the same SMEs Exporting: 17% of those surveyed had exported goods / 74% services outside of the Republic of Ireland in the previous 12 months. 23 78% Demand for Credit In the June 2009 survey, 26% of respondents indicated that there had Relationship with Banks: The profile of respondents in this survey was the September 2009 survey survey were customers of their principal bank for more than 20 years been either an increase/consistent level of turnover, this was 22% in broadly similar to the June 2009 survey. 43% of respondents to this (June 2009: 39%). Banks were not limited to those participating in the Professional Support: Some 50% of SMEs sought professional advice Review. from auditors, accountants and other professionals) regarding ther financing requirements Graph 5: Respondent Profile by Length of Relationship with the Bank More than 20 years Employee Numbers: Fewer respondents indicated that they had reduced staff levels compared to the June 2009 survey and the trend Between 11 and 20 years appears to indicate a levelling off in the rate of employee reduction. Between 5 and 10 years The percentage of SMEs who are ‘increasing’ staff levels remains below 10%. Between 2 and 4 years Up to 2 years Graph 4: Respondent Profile by Movement in Number of Employees Not a customer / only joined / not sure September 2009 June 2009 0% 20% 30% 40% Percentage of Respondents 6% 7% 10% 36% Membership of Business Representative Organisations: Almost 60% of Increased 44% respondents were members of one or more business representative Decreased 50% organisation. The number of members by business representative Remained the same organisation, recognising that an individual SME business may be a 57% member of one or more organisations is depicted below: 24 50% Demand for Credit Graph 6: Respondent Profile by Membership of Business Representitive Organisations Graph 7: Level of Demand 60% Percentage of Respondents A Chamber of Commerce affiliated to Chambers Ireland Irish Business And Employers Confederation (IBEC) Irish Small and Medium Enterprises Association (ISME) RG-DATA Advisory Board Sector Specific Association (e.g. CIF, IFA, IBA, PIBA, VFI etc) Small Firms Association 50% 40% 30% 20% 10% 0% June 2009 Other 0 50 100 150 200 250 300 350 September 2009 Bank Requests: Amongst participating banks, 90% of those customers Number of Memberships who made an application for credit in the period under review, applied Respondents to the demand survey who are medium size companies are ineligable to be members of SFA to their own bank. Requested Products: The type of credit product demanded has changed slightly 2.3 Requests for Credit over the two surveys; SMEs are still requesting new overdraft/increased overdraft and loans in large numbers, however the demand for loans as a percentage of total requested products, has Level of Demand: Demand for credit, based on the percentage of increased slightly (by 4% of total applications) whilst the demand for to 46% (last 7 months). 79% of those requests were formal requests applications). Overdrafts, either new overdrafts or increases in existing which is assessed internally by the bank) The profile of formal months to September 2009 (June 2009: 43%). It should be noted that 2009 survey. compared to previous periods customers who requested credit, has dropped from 52% (12 months) leasing and hire purchase products has decreased (by 5% of total for credit (where a customer completes a formal application form overdraft facilities accounted for 44% of requested products in the 7 requests has increased 5 percentage points from 74% in the June overall demand for credit in the period to September 2009 has fallen as 25 Demand for Credit Table 1: Reasons for Request for Credit Graph 8: Type of Credit (Product) Requested Percentage of Applications 60% Reason Request 50% June 2009 September 2009 40% 30% 20% New overdraft Increased overdraft Loan June 2009 Invoice Leasing or Hire Discounting Purchase Other September 2009 24% +2 2.Decline in business 16% 17% +1 3.Slow down in debtor 13% 12% -1 4.Bad debts increasing 9% 9% - 5.Increase in supplier costs 5% 6% +1 10% 9% -1 7.Property related loan 7% 5% -2 8.New business venture 8% 7% -1 10% 11% +1 100% 100% 6.Expansion Exporting Companies: products requested by companies who indicated they were involved in export activities were broadly in line with those requested by all SMEs – i.e. increased overdrafts, followed 9.Other by loans and followed by leasing and hire purchase products. Nature of Demand for Credit Movement 22% collection 0% Point 1.Working capital / cash flow revenues 10% Percentage It should be noted that more than one reason was given in certain cases The table below sets out the main reasons behind the requests for in respect of a request for credit. credit by Irish SMEs: The predominant reason (behind the request by an SME for credit) was either working capital or cashflow based (1-5 above). At 68%, this represents an increase of 3 percentage points on the previous survey. The level of decline which SMEs are experiencing in business revenues appears to be a significant factor in their demand for credit. 26 Demand for Credit Emphasis on expansion, new business ventures and property Graph 10: Seasonality of Demand acquisition (6-8 above) would appear to have become less of a driver for new credit in the period of this Review. Q1 - Turnover is seasonal in nature The reason for making a request can be graphically represented as follows: Q2 - Demand for credit is also seasonal in nature as a result of turnover Graph 9: Reasons for Request for Credit Percentage of Reasons 100% Q3 - Seasonal demand for credit is 20% greater than norm 80% 60% 0% 10% 20% 30% 40% 50% Percentage of Total Respondents by Question 40% Of those respondents who indicated that seasonal demand for credit 20% 20% greater than normal credit requirements, the majority indicated that additional credit of between 21-49% was required. Quarters 1 and 4 and 0% Working Capital Growth/Expansion June 2009 Other specifically January and December would appear to be the periods in September 2009 which the highest level of seasonal demand is apparent Seasonality The three sectors with the highest seasonal demand for credit would Seasonality: 43% of respondents indicated that their business • appear to be the following: • turnover was seasonal in nature. 24% of respondents indicated that • their demand for credit is also seasonal in nature as a result of the seasonal nature of their business. Agriculture, Forestry and Fishing Retail, Trade and Repair (Motor) Hotels and Restaurants It is clear from the above analysis that seasonality does not have a significant impact on the demand for credit amongst SMEs 27 Demand for Credit Informal Applications 2.4 Approvals and Declines 21% of respondents seeking credit did so in an informal capacity. Overall Decline Rate: The rate of decline amongst participating banks When asked for reasons as to why no formal application was made, was 28%, an increase of approximately 4 percentage points on the June the majority stated that an informal request was sufficient due to the 2009 figure. repeat nature of their business or the personal relationship they enjoyed with their principal bank. A decline can be considered as an unsuccessful request for credit. The decline rate across banks representing the significant majority of This can be presented graphically as follows: applications varied with a range of 17% to 30%. Those outside this range can be considered as immaterial in the context of this decline analysis. Graph 11: Reasons for Not Making A Formal Application An analysis of bank data presented in Section 3 of this Report would suggest a decline rate of 13.6% (June 2009 – 14%) representing a Other difference of some 14 percentage points between the declines rates reported by respondents to the demand survey and those recorded by No need to (inf ormal request suff icient due to repeat business/personal relationship with bank) banks. This would primarily appear to arise as a result of a difference in Knew that formal application would not be successful perception as to what constitutes an application for credit and when and how credit applications are recorded on participating banks’ systems Don't know However, it is our opinion that given the limitations of existing credit application processes and systems in participating banks, on the basis As a test to see if it would be possible to get request that banks do not record declines in a consistent manner across banks, 0% 10% 20% 30% 40% 50% 60% and following our analysis of bank records, a decline rate of 70% approximately 18% in this and the prior period may be more Percentage of Total Informal Applications representative. This is explained in greater detail in Section 3 below. 28 Demand for Credit The participating banks are attempting to address these limitations the highest level of decline at 31% (June 2009: 30%) and medium SMEs and will do so over time. experiencing the lowest levels of decline at 23%. The trend appears to indicate that the micro SME decline rate is relatively stable at 30/31%; Decline Rate by Product: Decline rates varied by type of credit however, the small SME decline rate has increased by 5 percentage product requested. Invoice discounting had the highest decline rate points to 29%. The decline rate for medium size SMEs has increased by at 38% followed by new overdrafts at 34% and increased overdrafts at 4 percentage points to 23%. 32%. The comparison of decline rates by product between this report and the previous June 2009 SME Lending Report are as follows: Graph 13: Decline Rate on Applications for Credit by Company Size 40% Percentage of Applications Graph 12: Decline Rate By Product Percentage of Applications 45% 40% 35% 30% 25% 20% 15% 30% 20% 10% 0% Micro 10% Small June 2009 Medium September 2009 5% 0% New overdraft Increased overdraft June 2009 Loan Invoice Discounting Leasing or Hire Purchase Declines Rates For Non Bank Finance: in the course of this survey, Other applicants were asked to indicate whether they had applied for non bank finance in the 7 months to September 2009. Non bank finance includes September 2009 the following: • • Declines Rate By Company Size: The rate of decline varied somewhat • across micro, small and medium SMEs with micro SMEs experiencing 29 Government financial support Venture capital finance Business angel or investor finance Demand for Credit Only 11% of respondents indicated that they had applied for non- bank finance in the period of the survey. Of those applications, 38% were informal. Of those participants who applied for non-bank finance, 68% of applications related to government financial support, however this represents a relatively small number of applications overall. The decline rate associated with non-bank finance was 31% Decline Rate for Exporting Companies: the decline rate associated with companies who indicated that they had exported goods / services worth more than €100,000 outside of the Republic of Ireland in the previous 12 months was 29%, or one percentage point higher than the overall rate. Decline Rate for Companies Involved in Computer Software/Hardware Industry: the decline rate associated with companies who indicated that they were involved in the development, selling or implementation of hardware or software for the computer industry was 39% or 11 percentage points higher than the overall rate. However it should be noted that this rate is based on a very small sample and as such may not be representative of the actual position. 30 Demand for Credit Reasons For Decline Survey results indicate that certain factors have an impact on, or, are perceived to play a part in, the decline of an application for credit by a bank. The graph below sets out the main reasons for decline of applications for credit. Graph 14: Reasons for Decline Requested f acility sanctioned at lower level / dif f erent structure No longer a type of business to which the bank is prepared to lend No longer a sector to which the bank is prepared to lend Change in bank pricing policy Change in bank lending policy Deterioration in business perf ormance Inadequate historic inf ormation provided June 2009 Account perf ormance/history September 2009 Inadequate repayment capacity 0% 5% 10% 15% Percentage of Reasons 31 20% 25% Demand for Credit The most common reason for decline cited by respondents was Graph 15: Analysis of Length of Time from Applications to Receipt ‘change in bank lending policy’. However the most significant change 40% respondents indicated that ‘deterioration in business Percentage of Applications between this and the previous report is the extent to which financial performance’ and ‘account performance/history’ were the main reasons behind the decline of their request for credit by a bank. If these reasons are profiled across those which relate specifically to customer trading activity and those which relate to the bank, it can be noted that 35% of reasons related to customer trading activity compared to 32% in June 2009. 35% 30% 25% 20% 15% 10% 5% 0% Less than one week More than one reason was given in certain cases in respect of a reason Up to 2 weeks Up to 3 weeks June 2009 for decline, and it was noted that there was a significant increase in the number of reasons given suggesting that applicants recognise that multiple factors play a part in either the approval or decline of a request for credit. In addition, a small number of applicants either did not specify a reason or indicated “other” as a reason and as such cannot be classified as a bank or customer trading specific reason and have not been represented in the graph above. Turnaround on Decisions: Based on responses from the survey 33% of applications were processed within one week of application, with 67% of applications being processed within four weeks (72%- June 2009). This indicates a slightly longer decision time than that represented in the June 2009 report. 32 Up to 4 weeks September 2009 Between 5-12 weeks More than 12 weeks Still pending Demand for Credit 2.5 Drawdown of Approved Facilities Criteria / Conditions Attaching to the Request: The most common Non Drawdown: Of those who were successful in their request for criteria/conditions attaching to credit approvals were cited to be credit, 13% did not (either wholly or in part) avail of those facilities. ‘personal The most frequent reasons cited for not availing of approved credit too much to avail of it/risk’. This compares to a figure of 14% in the June 2009 report. Percentage of Approved Applications Not Drawndown Graph 16: Reasons for not Availing of Approved Credit 100% 80% 60% 40% 20% 0% June 2009 Other and ‘requirement to provide management accounts’. This can be presented as follows: continue to be ‘not needed at present time’ and ‘costing the company Costing the company We don't need it at the too much to avail of moment it/risk guarantees’ Still pending September 2009 33 regular Demand for Credit Graph 17: Analysis of Conditions Attached to Approvals Req. to provide regular management accounts Different finance structure to that requested Personal guarantee Specific security Facility fee Security fee Other fees (arrangement or other) Requirement to maintain account with bank Requirement to convert overdraft to term loan June 2009 September 2009 Additional collateral Other pre-drawdown conditions 0% 2% 4% 6% 8% 10% 12% Percentage of Conditions 34 14% 16% 18% 20% 3 Supply of Credit Supply of Credit Section 3 Supply of Credit The following is a summary of the main points arising from an analysis of the supply of credit conducted as part of the Review of lending to SME’s, covering the period March 2009 – September 2009 and as compared to the period of the previous review – i.e. June 2008 to February 2009 (The June SME Lending Report): Highlights Total Lending to SMEs: The total lending by the participating banks to the Irish SME sector has decreased from €33.6 billion in February 2009 to €32.7 billion in September 2009. This represents a decrease of some 2.6%. Total SME lending excludes lending to development and speculative construction, speculative real estate and certain other non relevant subsectors. It should be noted that this Report, which covers the period March to September 2009, involved a more in-depth analysis of SME lending by participating banks than that represented in the June 2009 SME Lending Report. Additional information obtained has resulted in the technical reclassification of lending in a small number of instances, which was previously included as SME lending. This has led to revisions in both the product category and sectoral exposure figures. The overall impact has been to restate the value of lending to SMEs by some €818.5 million but overall trends in lending in this and the June 2009 report are unaffected Credit Applications: The number of formal applications for credit received by the participating banks continued to decrease in the current review period. In the prior period the number or volume of applications decreased by 11% over the period, in the current period a further decrease of 23% is apparent. In value terms formal applications received by the participating banks decreased by 42% in the prior review period, followed by a decrease of 27% in the current review period. Decline Rate: The overall decline rate for formal applications for the current review period is 13.6%. This is relatively consistent with the decline rate noted in the prior review period. This compares to a decline rate of 28% resulting from the Ipsos MRBI survey of bank customers. This difference would primarily appear to arise as a result of a difference in perception as to what constitutes an application for credit and when and how credit applications are recorded on participating banks’ systems. 36 Supply of Credit However, it is our opinion that given the limitations of existing credit application processes and systems in participating banks, the fact that informal credit applications are in most cases not recorded, on the basis that banks do not record declines on a consistent basis across banks, and following our analysis of bank records, a decline rate of approximately 18 % in this and the prior period may be more representative. This is explained in more detail in Section 3.4 below. The participating banks are attempting to address these limitations and will do so over time. Decline Rate by Product: The decline rate for loans and overdrafts decreased over the period from 13.8% in March 2009 to 11.5% in September 2009 representing an average decline rate of 12.8% for the period. In the case of Finance & Leasing, the decline rate increased from 18.3% in March 2009 to 19.4% in September 2009 representing an average decline rate for the period 18.2%. This compares to the decline rates on the demand side which indicate an increase in the decline rate for all products in the period to September 2009. Decline Rate by Sector: Sectors with the highest decline rates continue to be the Real Estate, Renting and Business Activities Sector, Electricity, Gas & Water Supply and Transport, Storage and Communications, whereas the lowest rate of decline is apparent in the Agriculture, Fishing and Other Community, Social and Personal Services Sectors Drawdowns: Drawdowns are being reported for the first time in this Report. Total drawdowns against approved loan and finance & leasing products in the 7 months of this Review amounted to €2.6 billion. This can be considered as a relatively accurate representation of the amount of new credit extended to customers of the participating banks in the seven month period March to September 2009 Overdraft Utilisation: At September 2009, 48% of approved overdraft limits (or €2.6 billion) remained unutilised and available to customers. Flowback: The average flowback rate (Loans and Finance & Leasing only) for the seven month period covered by this Review was 10.7%. This equates to an annual flowback rate of 18.3%. At this rate, the repayment term for total SME years would be almost 5.5 years. This varies substantially amongst individual participating banks. Credit Quality: The quality of the SME loan book as measured by bank credit grading systems deteriorated significantly in the period under review. In June 2008 15% of lending (in value terms) was contained in the ‘Watchlist’ or ‘Impaired’ categories i.e. customers who are operating in excess of their repayment obligations. In February 2009 the percentage had increased to 22% and by September 2009 it had increased further to 32%. This indicates that at September 2009 approximately one third of total SME customers represented by participating banks are operating in excess of their repayment obligations 37 Supply of Credit Approach and Overview IBF and the Department of Finance and was supported by a series of Supply of Credit In the case of most of the participating banks, this return was then detailed data definitions, as set out in Appendix II to this document. reviewed by Mazars on site, to determine the consistency of the This section summarises the current volumes of lending activity to methodology used in the collation and presentation of the data SMEs as represented by the five banks participating in the Review. returned where possible. These volumes have been expressed by an analysis of: • • • • • Total lending to SMEs - exposure Our review incorporated a limited analysis of data held by the Credit applications individual banks in their lending and credit systems together with Approvals/ declines some high level testing. Overdrafts limits v utilisation Credit quality Data analysis and testing was not however possible in the case of all participating banks or in the case of all the categories of lending data The initial Review, published in June 2009, also included an analysis of provided. the following, none of which have been examined in this Review: • • • Credit policy and its application Credit pricing and its application Changes in bank lending including terms and conditions of credit, security, repayment terms, credit insurance and rates charged • The reasonableness or otherwise of refusals by banks of requests for credit. Methodology Adopted Our review of the supply of credit was based on the analysis of data received from the five participating banks in the form of a formal data return. This return was devised by Mazars, with the contribution of the 38 Supply of Credit Supply Analysis Results 3.1 Total Lending to SME’s The current supply side review focussed on the period March 2009 to September 2009. In the context of the specific products reviewed as part of this Report, the total lending to Irish SME’s amongst participating banks may be represented as follows: Table 2: Total Bank Lending by Lending Product Category2 3 Previous Report Current Review Period 4 5 Feb March €million €million €million €million €million €million 26,756 26,670 26,728 26,727 26,797 Overdrafts 3,013 3,111 3,033 2,976 Finance & leasing 2,938 2,838 2,778 848 792 33,555 33,411 2009 Loans Invoice discounting Total 6 2009 April May 2009 2009 June 2009 July 2009 Aug 2009 Sept %Change €million 2009 €million Feb – Sept 26,662 26,477 26,479 -1% 2,926 2,887 2,831 2,885 -4% 2,718 2,664 2,720 2,644 2,587 -12% 794 782 766 749 728 727 -14% 33,333 33,203 33,153 33,018 32,680 32,678 -2.6% 2009 2 Total Bank Lending to SMEs is also referred to as exposure 3 Lending excludes F1SPEC & F2CONS – speculative and development construction carried out under contract, J2NBCR & J3CRUN & J5INUN &J8SPVS & J1OPEN –non bank credit grantors, credit unions, collective investment schemes, SPVs, asset-backed securities, pension funds, K11SPC& K12PRP – speculative and developmental real estate, public hospitals are excluded, however medical practices are included, N3CHRC & N4CHAR – churches and religious organisations and charities, Government lending, extra-territorial organisations and private household lending 4 5 ‘Review of Lending to SMEs – Final Report – June 2009’ The reclassifications noted on page 3, have led to revisions in the February 2009 lending figures reported in the June 2009 SME Lending Report. The changes involved a reduction of €97.8million in the loans figure: €527.6million in overdrafts, €44.6million in finance and leasing and €148.5 million in invoice discounting 6 Invoice Discounting as referred to in this section relates to invoice discounting and other commercial service type products e.g. supply line. These other products are not material enough to warrant separate disclosure above. 39 Supply of Credit Total lending by the participating banks to the Irish SME sector has decreased progressively from €33.6 billion in February 2009 to €32.7 billion in September 2009, representing a decrease over the period of 2.6%. This reduction is made up of decreases in all product areas with the largest decreases in value terms apparent in loans (€277million), representing a 1% decrease in loans and finance and leasing (€351million). However in value terms, smaller decreases are apparent in overdrafts and invoice discounting. It is important to consider these reductions in the context of the proportion of total lending which each individual credit product accounts for. At the end of current review period: • • 81% of the participating bank’s lending to the SME sector related to Loans, 8.9% to Overdrafts, • 7.9% to Finance and Leasing and • the remaining 2.2% to Invoice Discounting. The distribution of lending between each of these product categories has not varied significantly over the period under review. 40 Supply of Credit Total Bank Lending by Sector Total lending by business sector (using standard Central Bank sector codes) is as follows: Table 3: Total Bank Lending by Sector Previous Report7 Current Review Period Feb March 2009 2009 2009 2009 2009 2009 2009 Feb – Sept €million €million €million €million €million €million €million €million 2009 4,438 4,442 4,435 4,399 4,391 4,368 4,345 4,355 -2% B – Fishing 345 346 345 341 346 342 341 337 -2% C - Mining & Quarrying 330 327 329 314 309 298 317 351 +6% 2,836 2,800 2,772 2,805 2,776 2,736 2,705 2,744 -3% 286 277 268 266 261 262 234 243 -15% 8 1,332 1,398 1,382 1,338 1,328 1,331 1,310 1,303 -2% G – Wholesale/Retail Trade & Repair 7,421 7,383 7,349 7,288 7,252 7,188 7,095 7,069 -5% H - Hotels & Restaurants 7,182 7,273 7,340 7,381 7,404 7,414 7,362 7,327 +2% I - Transport, Storage & Communications 1,668 1,631 1,614 1,602 1,599 1,604 1,564 1,541 -8% 358 350 346 352 372 362 359 358 - K -Real Estate, Renting & Business Activities 10 4,113 3,906 3,858 3,817 3,799 3,809 3,757 3,760 -9% M -Health & Social Work11 1,350 1,375 1,388 1,391 1,402 1,397 1,387 1,383 +2% 1,896 1,903 1,907 1,909 1,914 1,907 1,904 1,907 +1% 33,555 33,411 33,333 33,203 33,153 33,018 32,680 32,678 -2.6% 2009 A - Agriculture, Hunting & Forestry D – Manufacturing E - Electricity, Gas & Water Supply F - Construction J -Financial Intermediation9 N -Other Community, Social & Personal Services12 Total 7 8 9 10 11 12 April May June July Aug Sept % Change Reclassifications have led to revisions in the February 2009 the lending figures reported in the June 2009 SME Lending Report. These are set out in the above table by means of revisions across a number of sectors. Excluding F1SPEC & F2CONS Excluding J2NBCR & J3CRUN & J5INUN & J8SPVS & J10PEN Excluding K11SPC & K12PRP Excluding part of M1HOSP – hospitals, however medical practices are included Excluding N3CHRC & N4CHAR 41 Supply of Credit The largest movement in percentage terms is apparent in sector E – in formal applications arising from renewals and amendments to existing Electricity, Gas and Water supply. This decline is however driven by a credit facilities or whether those amendments are bank or customer relatively small number of loans to that sector representing less than initiated. €43million. Our commentary is therefore centred on formal applications for new credit by new and existing customers. 3.2 Formal Applications for Credit by SMEs Total Formal Applications for Credit Formal Applications – New Applications from New & Existing A formal application for credit can be defined as one where a customer is Customers required to complete a formal application form which is assessed internally by the bank or the commencement of a formal system credit In most cases, initial enquiries for credit from SMEs are assessed informally by the relationship, lending or branch manager who forms an application process. initial assessment as to the merits or otherwise of the credit proposal. Total formal applications for credit can broadly be split into the following Using their experience of the lending process and the customer’s background, the manager advises as to whether the enquiry is suitable to two categories: 1. 2. New applications from both new and existing customers13 proceed to the formal application stage. facilities (e.g. restructuring/reduction etc.) Records of enquiries for credit are generally not maintained by the Applications for renewals and amendments to existing credit participating banks. For the period under review, we have not been able In our Review we endeavoured to analyse these categories of application to secure any meaningful analysis of credit enquiries. Formal credit separately and on a combined basis. We were successful in this regard applications cannot be considered as a comprehensive gauge of full for some banks however we were unable to undertake this level of demand for credit, however given the absence of other information we analysis for all. Due to the high proportion of the banks for which the have undertaken our review based on formal credit applications. An analysis could not be undertaken, and the impact that the exclusion of analysis of the full demand for credit by SMEs has been undertaken by the banks would have on the analysis, we cannot comment on the trends means of a separate demand survey as summarised in Section 2 of this Report. 13 Application category 1 includes the top-up portion where an existing customer applies for an increase in an existing facility. 42 Supply of Credit Graph 19: Applications (Number) The level of formal credit applications set out below represents all new 14,000 Number of Applications credit applied for by both new and existing customers of the participating banks (but, as explained above, excludes renewals and amendments of existing credit). The total value of formal credit applications in the period March 2009 – September 2009 was €4.5billion based on 82,280 discrete applications. 12,000 10,000 It should be noted that the current review period is a seven month period considered. 4,000 2,000 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 It is apparent that the total value of new formal applications for credit has decreased over the period under review. Graph 18: Applications (Value) In March 2009 formal applications for new credit amounted to €768 million for the month. In €800m September 2009 this had reduced to €557 million for the month. This €700m Value of Applications 6,000 - while the prior review period was a nine month period. In discussions throughout this Section, the differing review period lengths should be 8,000 equates to a decrease of 27% over the period. It is also evident that while the trend has been that of a decrease throughout the period, significant €600m fluctuations are apparent on a month to month basis. €500m €400m While the value of formal applications received by participating banks has €300m decreased over the period by 27%, the number of formal applications has €200m decreased by 23%. This indicates that the average application size has continued to decline, having fallen significantly in the earlier review €100m period. €0m Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 In the prior Review period (i.e. June 2008 to February 2009) the value of new applications from new and existing customers decreased by 42% over the period while the number of applications decreased by 11%. 43 Supply of Credit Due to the length of the period for which this Review (and the prior Estate, Renting and Business Activities sector (20.9%) and the Wholesale/ Review) have been carried out, it was not possible to assess the Retail Trade and Repair sector (12.8%) comprise the next largest sectors seasonality of any trends arising. in terms of application numbers. When credit applications are analysed on a sectoral basis, it is evident All other sectors each account for 7% or less of the total number of that a small number of sectors comprise a large portion of the total. formal applications. The following graph clearly illustrates this point. The profile of the number of applications by sector in the current and prior Review periods is shown in the table below. As is evident the profile follows a broadly similar pattern across both periods. Graph 20: Formal Applications by Sector (Number) Other Community, Social & Personal Services Health & Social Work Real Estate, Renting & Business Activities Financial Intermediation Transport, Storage & Communications Hotels & Restaurants Wholesale/Retail Trade & Repair Construction Electricity, Gas & Water Supply Manufacturing Mining & Quarrying Fishing Agriculture, Hunting & Forestry - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Number of Applications It is evident from the above that the Agriculture, Hunting and Forestry sector comprises a significantly larger portion of the total number of formal applications (38.2% of the total) than other sectors. The Real 44 Supply of Credit Table 4: Percentage of Applications By Sector (Number) Sector The illustration below reflects the split of formal applications by sector in value terms. June 08 Mar 09 Feb 09 Sept 09 26.9% 38.2% Fishing 0.4% 0.4% Mining & Quarrying 0.3% 0.3% Manufacturing 5.5% 5.9% Electricity, Gas & Water Supply 0.2% 0.2% Construction 2.1% 2.7% 11.8% 12.8% Hotels & Restaurants 5.1% 4.9% Mining & Quarrying Transport, Storage & Communications 4.5% 4.3% Fishing Financial Intermediation 0.7% 0.7% Agriculture, Hunting & Forestry to Agriculture, Hunting & Forestry Wholesale/ Retail Trade & Repair Real Estate, Renting & Business Activities Health & Social Work Other Community, Social & Personal Services Sector split not possible Total 14 Graph 21: Formal Applications by Sector (Value) to Other Community, Social & Personal Services Health & Social Work Real Estate, Renting & Business Activities Financial Intermediation Transport, Storage & Communications Hotels & Restaurants Wholesale/Retail Trade & Repair Construction Electricity, Gas & Water Supply Manufacturing €0m 19.4% 20.9% 2.3% 2.1% €200m €400m €600m €800m €1,000m €1,200m €1,400m Value of Applications The profile of applications in value terms is broadly similar to the profile in terms of number of applications. 6.4% 6.6% 14.4% - 100% 100% It should be noted that whilst the volume of applications in the Agriculture, Hunting & Forestry sector is high, the average application value is lower than the overall average. In addition, when considered in the context of the level of lending to the sector (Table 3 above), it would 14 In the prior period a portion of applications (14.4%) could not be analysed by sector, and as such these applications were grouped as one sectoral category. This issue has been addressed in the current report and it is apparent that all individual sectoral application levels have increased to reflect this reallocation. appear that the profile of agriculture lending is somewhat different to that of other sectors. 45 Supply of Credit for Finance and Leasing decreased by 37%. Formal Applications– Product Analysis Discounting are immaterial over the period. Applications for Invoice Due to limitations inherent in the systems of certain of the participating banks, we have been unable to separate formal applications for loans It was clear in the initial Review (June 2008 – February 2009) that the average size of a loan/overdraft requested has fallen significantly, over from those for overdrafts. the period. This trend would appear to have continued in the period of The illustrations on this and the following page show the overall this Review. The average value of a loan/overdraft request is now some proportion of new formal applications in each product category for the 7 40% lower in September 2009 than it was in June 2008. month period of the current Review, in terms of both value and number of applications. Similarly the average size of a finance and leasing request for credit is some 23% lower in September 2009 than in June 2009. In value terms, Loans and Overdrafts comprise 85% of monthly applications, Finance and Leasing comprises 12% of applications and The proportion of applications in each product category in both value and Invoice Discounting accounts for 3% of applications. In the prior period number terms is as follows: the proportions by product were 85%, 13% and 2% respectively. In volume terms, Loans and Overdrafts comprise 85% of monthly €800m applications while Finance and Leasing comprises 15% of applications perspective). In the prior period the proportions by product were also 85% and 15% respectively. In both value and number terms, the overall decrease in applications is being driven primarily by a decrease in loan and overdraft applications (due to the high proportion of applications for these products). The number of monthly loan and overdraft applications reduced over the period by 23%, while the number of monthly applications for Finance and Leasing decreased by 28%. In value terms monthly loan and overdraft applications reduced over the period by 26%, while monthly applications 46 €700m Value of Applications (Invoice Discounting applications are immaterial in nature from a volume Graph 22: Formal Applications by Product (Value) €600m €500m €400m €300m €200m €100m €0m Mar 09 Apr 09 Loans & Overdrafts May 09 Jun 09 Finance & Leasing Jul 09 Aug 09 Invoice Discounting Sep 09 Supply of Credit Graph 23: Formal Applications by Product (Number) Graph 25: Formal Applications by Product (Number) Number of Applications Number of Applications 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - 10,000 8,000 6,000 4,000 2,000 Mar 09 Mar 09 Apr 09 Loans & Overdrafts May 09 Jun 09 Finance & Leasing Jul 09 Aug 09 Sep 09 Invoice Discounting product in the current review period is set out below: Graph 24: Formal Applications by Product (Value) €700m €600m €500m €400m €300m €200m €100m €0m Mar 09 Apr 09 Loans & Overdrafts May 09 Jun 09 Finance & Leasing Jul 09 Aug 09 Apr 09 Loans & Overdrafts The trend or movement in the value and number of applications by Value of Applications 12,000 Sep 09 Invoice Discounting 47 May 09 Jun 09 Finance & Leasing Jul 09 Aug 09 Sep 09 Invoice Discounting Supply of Credit 3.3 Credit Approvals Analysis of Approvals of Formal Application by Product The graph below sets out the relationship between the number of formal applications received and approvals granted over the period under The graph below sets out the total number of approvals of formal applications for new credit over the period of review (excluding approvals review. of renewals and amendments of existing credit). 12,000 12,000 Number of Applications Number of Applications 14,000 Graph 27: Profile of Approvals of Formal Applications by Product (Number) Graph 26: Profile of Formal Applications and Approvals (Number) 10,000 8,000 6,000 4,000 2,000 Mar 09 Apr 09 May 09 Applications Jun 09 Jul 09 Aug 09 10,000 8,000 6,000 4,000 2,000 Mar 09 Sep 09 Apr 09 Loans & overdrafts Approvals May 09 Jun 09 Finance & Leasing Jul 09 Aug 09 Sep 09 Invoice Discounting The number of approvals per month has decreased by approximately 22% While some applications received in one month may not be approved until over the period. This trend closely reflects the downward trend in the a later month, it is evident that there is a consistent relationship between number of formal applications of 23% set out above. applications and approvals over the period. 48 Supply of Credit Analysis of Approvals of Formal Application by Sector The following graph sets out the sectoral analysis of approvals over the The graph below shows the same analysis by value of applications: period under review (by number): Graph 29: Approval of Formal Applications by Sector (Value) Graph 28: Approval of Formal Applications by Sector (Number) Other Community, Social & Personal Services Other Community, Social & Personal Services Health & Social Work Health & Social Work Real Estate, Renting & Business Activities Real Estate, Renting & Business Activities Financial Intermediation Financial Intermediation Transport, Storage & Communications Transport, Storage & Communications Hotels & Restaurants Hotels & Restaurants Wholesale/Retail Trade & Repair Wholesale/Retail Trade & Repair Construction Construction Electricity, Gas & Water Supply Electricity, Gas & Water Supply Manufacturing Manufacturing Mining & Quarrying Mining & Quarrying Fishing Fishing Agriculture, Hunting & Forestry Agriculture, Hunting & Forestry - 5,000 10,000 15,000 20,000 25,000 30,000 €0m Number of Applications €250m €500m €750m €1,000m €1,250m Value of Applications Approximately 72% of approvals were concentrated in three sectors; the The following table sets out the total approval rate (on a combined Agriculture, Hunting and Forestry sector (40%); the Real Estate, Renting product basis) for each sector over both the prior review period and the and Business Activities sector (19%); and the Wholesale/ Retail Trade and current review period: Repair sector, (13%) In the prior period these three sectors accounted for 67% of applications. 49 Supply of Credit Table 5: Approval Rate By Sector It should be noted in reviewing the above table that the volume of credit June 08 Mar 09 applications in some sectors is relatively small and as such a small Feb 09 Sept 09 disproportionate impact on the overall approval rate for that sector. Agriculture, Hunting & Forestry 90.1% 90.0% Fishing 91.3% 90.6% Mining & Quarrying 88.3% 84.1% Manufacturing 88.2% 84.9% Electricity, Gas & Water Supply 89.1% 82.0% Construction 89.7% 86.3% Wholesale/ Retail Trade & Repair sector 87.5% 85.5% Hotels & Restaurants 86.8% 85.5% Transport, Storage & Communications 85.2% 82.3% Financial Intermediation 90.7% 84.2% Activities 80.6% 79.5% Health & Social Work 91.5% 87.8% Sector to Real Estate, Renting & Business Other Community, Social & Personal Services Sector split not possible All Sectors 15 to number of applications either approved or declined may have a The spread of approval rates by sector in the current review period ranges from 92.8% (for the Other Community, Social and Personal Services sector) to 79.5% (for the Real Estate, Renting and Business Activities sector). The demand survey suggests a rate of approval of 72% across all banks lending to SMEs whereas the bank data would suggest an approval rate of 86% (as set out above), representing a difference of some 14 percentage points between the two. This would primarily appear to arise as a result of a difference in perception as to what constitutes an application for credit and when and how credit applications are recorded on participating banks’ systems. The banks formally measure applications for credit only when they enter into the bank’s credit systems and processes whereas in general it would appear that customers recognise applications from credit enquiry stage. 95.5% 92.8% 77.9% - 86.1% 86.4% Formal applications are sometimes completed internally within the bank as distinct from by the customer. In addition, credit applications are, in some cases only recorded on bank credit systems when a formal decision has been reached by the bank. 15 In the prior period a portion of applications (14.4%) could not be analysed by sector, and as such was grouped as one sectoral category. This issue has been addressed in the current report and it is apparent that all individual sectoral application levels have increased to reflect this reallocation. As such whilst the approval rate has increased on an overall basis from 86.1% to 86.4% as compared to the previous period, individual approval rates have decreased. As such the sectoral approval rates for March to September 2009 should be considered as representative of the actual position. 50 Supply of Credit It is more meaningful however to review approvals in terms of the The graph below sets out the approval rates for loans & overdrafts and approval rates per month for each product. finance & leasing for both the prior and current review periods. Graph 30: Approval Rates for Formal Applications by Product Percentage of Applications 100.0% 95.0% 90.0% 85.0% Loans & overdrafts Finance & Leasing 80.0% 75.0% 70.0% Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 The approval rate for each lending product category is as follows: • 87% of formal applications for new loan and overdraft credit were approved over the period (the monthly approval rate ranges from 86% to 89% over the period). In the prior period the approval rate for loans and overdrafts was 86%. It is not possible to separately analyse loans and overdrafts • The corresponding approval rate for Finance & Leasing was 82% (the monthly approval rate ranges from 81% to 83% over the period). prior period the approval rate for Finance & Leasing was 85%. 51 In the Supply of Credit • 3.4 Credit Declines The Invoice Discounting approval rate fluctuates significantly over the period. It should be noted that there were only 230 applications Our analysis of declines includes all formal applications made in the over the 7 month period for Invoice Discounting and as such it was not deemed material for inclusion in the above graph. review period which were not approved. Further analysis of the invoice discounting approval rate is deemed Any analysis of the rate of declined formal applications is limited. This is immaterial. • also due to the nature in which information is recorded on participating bank systems (as set out earlier, enquiries are not recorded and formal The blended approval rate for loans & overdrafts and finance & applications are in some cases only logged after an initial assessment leasing is 86.4% (prior period 86.1%); see below for an analysis of has been completed by lending or branch managers). this by sector. The rates of decline, in number, product and sector are the inverse of From April 2009 onwards, there was a noticeable upward trend in the approval rates set out above. The graph below sets out the trend in the approval rate for loans and overdrafts the total number of declines in each month: 2,000 Number of Applications • Graph 31: Declines of Formal Applications (Number) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - Mar 09 52 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Supply of Credit Overall Decline Rate • credit amongst customers and banks • Similar to the position noted in the analysis of approvals, the level of Differences in when and how credit applications are recorded on participating banks’ systems declines has decreased significantly over the period. The trend in declines is influenced directly by the trend in formal applications. A difference in perception as to what constitutes an application for • In Certain limitations associated with the use of telephone surveys such as those used on the demand side that regard it is again more meaningful to consider the rates of decline • as opposed to the volume of declines. The fact that informal requests for credit or enquiries are not in all cases recorded by participating banks • If the decline rate is calculated using a consistent approach, to that used The fact that processes used in participating banks for the recording of credit applications and declines are not the same across all banks. in the June 2009 report, and on the basis of the data currently held in However the processes used by each bank are consistent with those the participating banks systems, a rate of 13.6% is apparent (14% June they used in the period covered by the June 2009 SME Lending 2009 Report). The rate of decline of applications for credit reported by report. SMEs (based on the demand survey) was 28% across all requests, an • increase of approximately 4 percentage points on the June 2009 survey. The fact that the demand survey is based on all banks participating in the Irish market, whereas on the supply side, the data is based on the five banks participating in this Review only, although this is not It is likely that some level of overstatement is inherent in the demand likely to have a material effect on the decline rate decline rate, however given the fact that only two such surveys have been conducted to date, and as such significantly less data exists than On the basis of these differences and following our analysis of bank on the supply side, it is not possible to quantify the extent of that records, it is our opinion that the impact of these limitations in bank overstatement as of yet. systems and processes is to understate the overall supply side decline rate. As such a difference of some 14 percentage points is apparent between the decline rate reported by customers based on the demand survey and As such and in order to address this difference, we have performed an the decline rate recorded by banks based on the data currently held in additional level of work in order to determine the quantum of this their systems (supply side) understatement. This work involved: • The difference in the demand and supply decline rates would primarily The analysis of the variances in the range of credit decline rates across application classes and sectors appear to arise as a result of 53 Supply of Credit • An assessment of the impact of the adjustment of decline rates for Finance and Leasing The reworking of credit application and decline rates based on this in March 2009 to 19.4% in September 2009 representing an average anomalies apparent in data received • In the case of Finance & Leasing, the decline rate increased from 18.3% analysis for a portion of credit applications decline rate for the period 18.2%. This compares to an average decline rate of 14.7% in the period covered by the June 2009 Report. On the basis of the additional work which we have performed, and given the limitations inherent in bank systems and processes as outlined Invoice Discounting and the prior period may be more representative. meaningful analysis of credit applications or decline rates is possible. above, it is our opinion that a decline rate of approximately 18 % in this Due to the small number of invoice discounting applications no further The participating banks are attempting to address the limitations in the These decline rates compare to the rates reported on the demand side over time. However it is unlikely that it will be possible to ever period to September 2009. credit application systems and processes and we understand will do so which indicate an increase in the decline rate for all products in the completely address the limitations associated with credit application processes and systems and in particular to fully record informal requests for credit. The table below sets out the number of applications and the decline rate for all sectors for both loans and overdrafts and finance and leasing. This table also allows a more detailed sectoral comparison than that included in Table 5 above: Decline Rate by Product Loans and Overdrafts The decline rate for loans and overdrafts decreased over the period from 13.8% in March 2009 to 11.5% in September 2009 representing an average decline rate of 12.8% for the period as compared to an average decline rate of 13.7% in the period covered by the June 2009 Report. 54 Supply of Credit Table 6: Decline Rate by Product and Sector – Loans and Overdrafts and Finance & Leasing Loans and Overdrafts Sector Finance & Leasing Prior Period Current Period Prior Period Current Period 9 Months 7 Months 9 Months 7 Months No of Decline No of Decline No of Decline No of Decline Applications Rate Applications Rate Applications Rate Applications Rate 29,103 10.1% 28,670 9.7% 2,866 7.1% 2,735 12.6% Fishing 418 9.1% 312 9.0% 21 0.0% 32 13.6% Mining & Quarrying 259 12.3% 183 18.1% 99 10.1% 51 8.1% 4,538 12.1% 3,551 15.1% 1,969 11.0% 1,296 14.6% 152 9.2% 149 16.7% 83 14.3% 34 23.5% 1,504 6.6% 1,474 10.6% 1,018 15.8% 703 20.1% 12,249 12.6% 9,114 14.1% 1,698 12.4% 1,327 14.8% Hotels & Restaurants 4,903 12.2% 3,624 13.9% 1,128 17.3% 389 19.9% Transport, Storage & Communications 3,035 15.3% 2,390 14.9% 2,337 14.3% 1,123 23.5% 731 9.2% 524 15.6% 127 10.5% 70 16.0% 20,303 17.2% 14,510 18.6% 2,718 35.6% 2,688 31.1% Health & Social Work 2,410 8.9% 1,493 12.8% 357 5.9% 194 7.2% Other Community, Social & Personal Services 4,277 1.9% 3,783 6.3% 3,323 8.0% 1,632 9.1% 16,981 22.0% 100,863 13.7% 69,777 12.8% 17,744 14.7% 12,274 18.2% Agriculture, Hunting & Forestry Manufacturing Electricity, Gas & Water Supply Construction Wholesale/ Retail Trade & Repair sector Financial Intermediation Real Estate, Renting & Business Activities Sector split not possible16 Total Average Number of Applications per Month 16In 11,207 9,968 1,972 1,753 the prior period a portion of applications could not be analysed by sector, and as such was grouped as one sectoral category. This issue has been addressed in the current report and it is apparent that all individual sectoral application levels have increased to reflect this reallocation. As such whilst the approval rate has increased on an overall basis as compared to the previous period, individual approval rates have decreased. As such the sectoral approval rates for March to September 2009 should be considered as representative of the actual position. 55 Supply of Credit 3.5 Credit Drawdowns This can be considered as a relatively accurate representation of the Commencing with the current review period we will report the amount amount of new credit extended to customers of the participating of credit drawn down with regard to Loans and Finance & Leasing. banks in the seven month period March to September 2009 Overdrafts and Invoice Discounting, due to the nature of the products, do not lend themselves to an analysis of credit drawn down. It should be noted that these draw downs include all credit drawn down in the period for Loans and Finance & Leasing, not just draw downs of applications sanctioned during the period. The drawdown figure includes both new and existing customers. Table 7: Credit Drawdown Sector Mar 09 to Sept 09 €m Loans 2,327 Finance & Leasing Total 311 2,638 The figures above includes data from all participating banks. 56 Supply of Credit 3.6 Working Capital Facility Analysis At September 2009, 48% of approved overdraft limits (or €2.6 billion) remained unutilised and available to customers (June 2009 €3 billion) Capacity in Approved Overdraft Limits The overall value of approved limits has fallen during the period of this An important aspect in the analysis of overdraft facilities is the Review by 5%. analysis of the amount drawn by customers over the period versus the total amount approved by the banks. This is set out in the illustration below. Invoice Discounting The average overdraft utilisation rate in the participating banks over At the period was 52%. In the prior Report we noted that the average overdraft utilisation rate was 49%. 2009 Invoice Discounting accounted for only approximately 2.2% of total SME lending in the participating banks. In The average utilisation rate has the prior period it was noted that Invoice Discounting accounted for 3% therefore increased by 3 percentage points but this largely results of total SME lending. from a decline in overdraft limits over the period. €7bn September Total lending for Invoice Discounting has decreased by 14% over the Graph 32: Utilisation of Approved Overdraft Limits current review period, following a decrease in the prior review period. We understand that this is driven mainly by the fact that as customer €6bn turnover decreases, debtors and therefore availability of funding €5bn decreases proportionately. €4bn €3bn We also noted from our review of Invoice Discounting that, similar to €2bn the position with overdrafts, there is a level of availability of approved €1bn debtors for funding that is not being utilised by customers. €0bn Mar 09 Apr 09 May 09 Utilised Jun 09 Jul 09 Aug 09 Sep 09 Approved Limit 57 Supply of Credit 3.7 Flowback R= repayments (capital and interest) The percentage of total lending which is being repaid on an ongoing O =opening exposure basis is referred to as Flowback. An analysis of flowback has been EM= valuation effects arising from exchange-rate movements included in this report in order to provide some insight into the level of credit repayments participating banks. being made by SME customers to D=drawdowns in the period the I=interest charged in the period The Flowback calculation for the current review period included data While we have been unable to fully quantify the level of credit re- provided by four of the five participating banks. structuring activities which took place during the period (i.e. restructuring, extensions, repricing etc.), we have examined the The calculation results in a flowback percentage for the seven month percentage of the overall SME book which was repaid during the 7 period of 10.7%. This equates to an annual flowback rate of 18.3%. At months covered by the Review. this rate, the repayment term for SME Loans and Finance & Leasing would be about 5.5 years. Flowback is being reported from the perspective of Loans and Finance & Leasing only (as Overdrafts and Invoice Discounting products Factors which impact on the flowback calculation in particular banks whereby customers operate on a limit basis do not lend themselves to include the following: this type of analysis). The current period is the first period for which flowback has been reported. • • The agreed formula for the calculation of flowback is as follows: Their specific mix of lending products The extent to which special arrangements have been entered into with customers, such as term extensions and moratoriums on repayments • _________________R_______________ The extent to which interest only repayment arrangements or interest only repayment periods form part of the SME profile of the O + EM + D + I book 58 Supply of Credit 3.8 Movements in Credit Grades Performing It is evident, that the percentage of the participating bank’s total Each participating bank operates a formal credit grading system. The lending to SMEs graded as ‘Performing’ has decreased from 85% to criteria used for credit grading include business risk, management 78% in the period June 2008 to February 2009 and has decreased strength and experience and financial risk considerations such as further to 68% at September 2009. This degradation has manifested security cover/probability of default etc. The credit grade influences itself in an overall 10% increase in the value of ‘Watchlist’ cases and a the lending decision, the level of lending discretion necessary and the 7% increase in the value of ‘Impaired’ cases. pricing of the credit facility. Watchlist We reviewed the structure of each of the participating banks’ grading In June 2008 14% of total SME lending (in value terms) was considered profiles over the period under the following three headings; • as ‘Watchlist’. By February 2009 this had increased to 20% and by September 2009 it had increased further to 24%, representing an Performing accounts where the customer is able to make the increase of some 10 percentage points in the value of SME lending, required credit facility repayments to the financial institution within graded as “Watchlist” over the 15 month period June 2008 to the terms of the agreement and the account is considered to be September 2009. performing, • Watchlist accounts which are 30 to 90 days in excess of their Impaired payment obligations • In June 2008 1% of total SME lending (in value terms) was considered Impaired accounts which are more than 90 days in excess of their as ‘Impaired’. By February 2009 this had increased to 2% and by payment obligations and are considered as impaired under Basel 2 September 2009 it had increased further to 8%, representing an rules. increase of some 7 percentage points in the value of SME lending, graded as “Impaired over the 15 month period June 2008 to September The table and graph below set out the movement by credit grade of 2009. SME customers in participating bank’s representing the majority of SME lending, for both the prior and current Review periods. The large movement of “Performing” credit into “Watchlist” or All of the information presented in relation to credit grades and its “Impaired” grades indicates that at September 2009 approximately one analysis is based on the value of lending in each credit grade category. third of total SME customers represented by banks participating in this 59 Supply of Credit Review (in value terms) is operating in excess of their repayment : obligations. Graph 33: Profile of Credit Grades 100% Whilst our review did not encompass an analysis of the reasons behind this movement, it is apparent that it may result from both economic 80% and trading factors together with internal factors within participating banks. 60% This can be represented as follows: 40% 20% Table 8: Profile of Credit Grades Month Performing Watchlist Impaired June 2008 85% 14% 1% February 2009 78% 20% 2% -7 6 1 February 2009 78% 20% 2% September 2009 68% 24% 8% Movement -10 4 6 Movement (percentage 0% Profile at June 2008 Profile at Feb 2009 Performing points) (percentage points) 60 Watchlist Profile at Sept 09 Impaired A ppendices Appendix I – Demand Survey Questionnaire Used 62 SME LENDING Questionnaire FINAL Good morning/afternoon/evening. My name is ………………… from TNS mrbi, the opinion and polling research company. We are conducting a survey on behalf of the Department of Finance. Please may I speak to the person with primary responsibility for financial matters in your business? Verify right person. Q.1 Can I just confirm that you are the person who has primary responsibility for financial matters in your business? Yes .......................................................................................... No ............................................................................................ 1 2 CONTINUE We are conducting a survey on bank lending to SME’s on behalf of the Department of Finance. It is a survey that will be conducted again over the coming months in order to monitor changes to bank lending policies. All information that we collect will be kept in the strictest confidence and results will be reported at a merged level only. It will not be possible to identify any particular individual or business in the results. SECTION 1 – COMPANY INFORMATION Q.1a For this survey we need to talk to businesses of different sizes and in different industry sectors. Can you confirm that your business operates in _________________ (sector)? Yes .......................................................................................... No ............................................................................................ 1 2 IF ‘NO’ at Q.1a ASK INDUSTRY SECTOR Q.1b ASK IF NO AT Q.1a Q.1b What industry sector do you operate in? PROBE TO PRECODES – SINGLE CODE Agriculture & forestry & fishing .............................................................................................................. 1 Manufacturing - Processing & Food from agricultural activities + manufacturing of food from non agricultural activities ( tobacco and beverages) ..................................................................................... 2 Manufacturing - High Tech (including pharmaceutical, electronic, electrical equipment etc) .................. 3 Manufacturing - All other manufacturing................................................................................................ 4 Construction - General construction ( including general building & civil engineering) ............................ 5 Construction - All other construction activities (excluding speculative activities) ................................... 6 Wholesale ............................................................................................................................................ 7 Retail Trade & Repairs (non motor) ...................................................................................................... 8 Retail Trade & Repairs (motor only) ...................................................................................................... 9 Hotels & restaurants ............................................................................................................................. 10 Transport, storage & communications ................................................................................................... 11 Financial & Insurance Activities ............................................................................................................ 12 Real estate activities (excluding speculative activities) .......................................................................... 13 Professional, scientific & technical ........................................................................................................ 14 Administrative & Support Service Activities ........................................................................................... 15 Human Health & Social Work Activities ................................................................................................. 16 Other .................................................................................................................................................... 17 CHECK QUOTAS CLOSE ASK ALL Q.1c Can you confirm whether your business involved in the computer software/hardware industry? By ‘involved’ we are referring to businesses that develop, sell or implement software and /or hardware. SINGLE CODE Yes .......................................................................................... No ............................................................................................ Q.1d 1 2 In the last 12 months did your business export goods or services outside of the Republic of Ireland with a total value greater than €100,000? SINGLE CODE Yes .......................................................................................... No ............................................................................................ 1 2 ASK ALL Q.2 Including yourself, how many people are currently employed in your business? SINGLE CODE 1 (self-employed) .................................................................... 2 - 4 ......................................................................................... 5 - 9 ......................................................................................... 10 -20 ...................................................................................... 21 – 49 .................................................................................... 50 - 100 ................................................................................... 101 – 249 ................................................................................ 250+ ........................................................................................ Refused/ don’t know................................................................ Q.2a 1 2 3 4 5 6 7 8 9 MICRO – CHECK QUOTAS SMALL CHECK QUOTAS MEDIUM CHECK QUOTAS CLOSE What was your business’ turnover in the last 12 months, i.e. since September 2008, as per the following bands? READ OUT - SINGLE CODE Up to €100,000 ........................................................................ €100,001 - €500,000 ............................................................... €500,001 - €1m ....................................................................... €1,000,001 - €2m .................................................................... €2,000,001 - €5m .................................................................... €5,000,001 - €10m .................................................................. €10,000,001 - €20m ................................................................ €20,000,001 - €50m ................................................................ €50m+ ..................................................................................... Refused / don’t know............................................................... 1 2 3 4 5 6 7 8 9 10 CLOSE GO TO Q.2b ASK ALL REFUSED/ DON’T KNOW AT Q2.a Q.2b For this survey we need to ensure we are interviewing companies with a turnover of less than €50million. Can you clarify whether your turnover is within the following bands? READ OUT – SINGLE CODE Less than or equal to €2m ...................................................... Between €2,000,001m and €10m ........................................... Between €10,000,001m and €50million .................................. Above €50million ..................................................................... Refused / don’t know............................................................... 1 2 3 4 5 CLOSE ASK ALL Q.3 How many years has your business been in operation? SINGLE CODE Up to 2 years ........................................................................... Between 2 and 4 years ........................................................... Between 5 and 10 years ......................................................... Between 11 and 20 years ....................................................... More than 20 years ................................................................. Q.4 1 2 3 4 5 Are you a member of any of these business representative organisations? READ OUT MULTICODE A Chamber of Commerce affiliated to Chambers Ireland ....... Irish Small and Medium Enterprises Association (ISME) ....... Small Firms Association .......................................................... Other (specify) ___________________________ ................. None ........................................................................................ 1 2 3 4 5 ASK ALL Q.5 In the last 7 months, i.e. from March 2009 to September 2009, has the turnover of your business increased, decreased or stayed the same? SINGLE CODE Increased ................................................................................ Decreased ............................................................................... Remained the same ................................................................ 1 2 3 GO TO Q.5a GO TO Q.5b GO TO Q.6 ASK ALL WHOSE TURNOVER HAS INCREASED AT Q5 Q.5a By about what percentage has your turnover increased? READ OUT - SINGLE CODE 0 – 9% ..................................................................................... 10 – 19% ................................................................................. 20 – 29% ................................................................................. 30 - 39% .................................................................................. 40 – 49% ................................................................................. 50%+ ....................................................................................... Not sure (DNRO) ..................................................................... 1 2 3 4 5 6 7 ASK ALL WHOSE TURNOVER HAS DECREASED AT Q5 Q.5b By about what percentage has your turnover decreased? READ OUT - SINGLE CODE 0 – 9% ..................................................................................... 10 – 19% ................................................................................. 20 – 29% ................................................................................. 30 - 39% .................................................................................. 40 – 49% ................................................................................. 50%+ ....................................................................................... Not sure (DNRO) ..................................................................... 1 2 3 4 5 6 7 ASK ALL Q.6 In the last 7 months, i.e. from March 2009 to September 2009, has your number of staff increased, decreased or stayed the same? SINGLE CODE Increased ................................................................................ Decreased ............................................................................... Remained the same ................................................................ 1 2 3 GO TO Q.6a GO TO Q.6b GO TO Q.7 ASK ALL WHOSE STAFF HAS INCREASED AT Q6 Q.6a By about what percentage has your staff increased? READ OUT - SINGLE CODE 0 – 9% ..................................................................................... 10 – 19% ................................................................................. 20 – 29% ................................................................................. 30 - 39% .................................................................................. 40 – 49% ................................................................................. 50%+ ....................................................................................... Not sure (DNRO) ..................................................................... 1 2 3 4 5 6 7 ASK ALL WHOSE STAFF HAS DECREASED AT Q6 Q.6b By about what percentage has your staff decreased? READ OUT - SINGLE CODE 0 – 9% ..................................................................................... 10 – 19% ................................................................................. 20 – 29% ................................................................................. 30 - 39% .................................................................................. 40 – 49% ................................................................................. 50%+ ....................................................................................... Not sure (DNRO) ..................................................................... 1 2 3 4 5 6 7 SECTION 2 – FINANCING YOUR BUSINESS ASK ALL Q.7 In the last 7 months, i.e. from March 2009 to September 2009, have you sought professional advice regarding your financing requirements? By professional advice we are referring to advice from auditors, accountants or professional financial advisors. SINGLE CODE Yes .......................................................................................... No ............................................................................................ 1 2 ASK ALL Q.8 With what bank is your main business account? SINGLE CODE AIB........................................................................................... Anglo Irish Bank ...................................................................... Bank of Ireland ........................................................................ Bank of Scotland (Ireland) ...................................................... National Irish Bank .................................................................. Ulster Bank .............................................................................. Permanent TSB ....................................................................... Rabobank ................................................................................ ACC ......................................................................................... GE Capital/ Woodchester........................................................ KBC (previously IIB) ................................................................ Other financial institution (specify) ____________________ . Q.8a How long have you been a customer of this bank? SINGLE CODE Not previously a customer / only just joined............................ Up to 2 years ........................................................................... Between 2 and 4 years ........................................................... Between 5 and 10 years ......................................................... Between 11 and 20 years ....................................................... More than 20 years ................................................................. Not sure ................................................................................... Q.9 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 In the last 7 months, i.e. from March 2009 to September 2009, have you requested from any bank, any of the following types of finance? It does not matter if you have been successful or not. READ OUT - MULTICODE New overdraft .......................................................................... Increased overdraft ................................................................. Loan ........................................................................................ Invoice Discounting ................................................................. Leasing or Hire Purchase........................................................ Other (specify) ____________________________ ............... None ........................................................................................ 1 2 3 4 5 6 7 GO TO Q.17 IF MORE THAN ONE REQUEST FOR ANY PARTICULAR TYPE OF FINANCE, ASK ABOUT MOST RECENT. Q.10 From which bank did you request______________ (FROM Q.9)? SINGLE CODE AIB........................................................................................... Anglo Irish Bank ...................................................................... Bank of Ireland ........................................................................ Bank of Scotland (Ireland) ...................................................... National Irish Bank .................................................................. Ulster Bank .............................................................................. Permanent TSB ....................................................................... Rabobank ................................................................................ ACC ......................................................................................... GE Capital/ Woodchester........................................................ KBC (previously IIB) ................................................................ Other financial institution (specify) ____________________ . Can’t recall .............................................................................. Q.11 I’m now going to ask you about your _______________ (FROM Q.9) request. Which, if any of these, were reasons for making your ____________ (FROM Q.9) request? READ OUT - MULTICODE New business venture ............................................................. Expansion ............................................................................... Decline in business revenues ................................................. Slow down in debtor collection ................................................ Bad debts increasing............................................................... Increase in supplier costs........................................................ Property related loan ............................................................... Working capital / cash flow ..................................................... In ability to secure credit insurance ........................................ Inability of your supplier to secure credit insurance on your business ......................................................................... Other (specify) __________________________ ................... Q.12 1 2 3 4 5 6 7 8 9 10 11 12 13 1 2 3 4 5 6 7 8 9 10 11 Did you make a formal request, an informal request or both, when applying for __________(FROM Q.9) SINGLE CODE Informal request ...................................................................... Formal application (i.e. filling out formal application form which is assessed internally by the bank) ............................... Both ......................................................................................... Other (specify)______________________ ............................ 1 GO TO Q.12a 2 3 4 Q.12a What were the reasons for not making a formal application? PROBE FULLY Q.13 From the date of application, how long did it take the bank to process your _____________(FROM Q.9) request? Less than one week ................................................................ Up to 2 weeks ......................................................................... Up to 3 weeks ......................................................................... Up to 4 weeks ......................................................................... Between 5 – 12 weeks ............................................................ More than 12 weeks ................................................................ 1 2 3 4 5 6 Q.14 Were you successful in your_____________ (FROM Q.9) request? SINGLE CODE Yes .......................................................................................... No ............................................................................................ Partially.................................................................................... 1 2 3 GO TO Q 14.a GO TO Q 14.b GO TO Q 14.a ASK ALL SUCCESSFUL / PARTIALLY SUCCESSFUL IN APPLICATION AT Q14 Q.14a Were any of the following criteria/ conditions attached to your ___________ (FROM Q.9) request? READ OUT - MULTICODE Requirement to provide regular management accounts/ debtors + creditors listings to the bank ................................... Different finance structure to that requested ........................... Personal guarantee ................................................................. Specific security ..................................................................... Facility fee ............................................................................... Security fee ............................................................................ Other fees (arrangement or other) .......................................... Requirement to maintain account with bank ........................... Requirement to convert overdraft to term loan ....................... Additional collateral ................................................................. Other pre drawdown conditions .............................................. Other (specify) _______________________________ ......... No ............................................................................................ IF CODES 1-12 AT Q14a ASK Q15 1 2 3 4 5 6 7 8 9 10 11 12 13 GO TO Q.16 ASK ALL UNSUCCESSFUL IN APPLICATION AT Q14 Q.14b Were any of the following reasons given by the bank for turning down your ___________ (FROM Q.9) request? READ OUT - MULTICODE Inadequate repayment capacity .............................................. Account performance/ history ................................................. Inadequate historic information provided ................................ Deterioration in business financial performance ..................... Change in bank lending policy ................................................ Change in bank pricing policy ................................................. The sector in which your business operates is no longer a sector to which the bank are prepared to lend ....................... The business which you are operating, is no longer a type of business to which the bank is prepared to lend ................. Requested facility sanctioned at lower level/ different Structure to that requested ..................................................... No reason given ...................................................................... Other (specify)______________________________ ............ None of these .......................................................................... 1 2 3 4 5 6 7 8 9 10 11 12 IF CODES 1-12 AT Q14b ASK Q.17 ASK ALL WHO HAD CRITERIA ATTACHED AT Q14a Q.15 Did any of these criteria / conditions prevent you from availing of the sanctioned facility? Yes .......................................................................................... No ............................................................................................ 1 2 ASK ALL SUCCESSFUL/ PARTIALLY SUCCESSFUL AT Q.14 Q.16 Have you availed of all or part of the facility or not availed of the facility? Yes, I have availed of all of the facility .................................... Yes, I have availed of part of the facility ................................. No, I have not availed of the facility ........................................ 1 2 3 GO TO Q.16a ASK ALL WHO HAVE NOT AVAILED OF FACILITY AT Q16 Q.16a What are the reasons for not availing of the facility to date? PROBE FULLY ASK ALL SECTION 3 – NON BANK FINANCING Q.17 Did you enquire about any of the following types of non bank finance? READ OUT - MULTICODE Government Financial Support .............................................. Venture Capital Finance ......................................................... Business Angel or Investor Finance ....................................... Other non bank finance (specify) ____________________ ... None (DNRO) .......................................................................... 1 2 3 4 5 GO TO Q.19 Q.17a Did you make an informal request, a formal request, or both, when applying for __________(FROM Q.17) SINGLE CODE Informal request ...................................................................... Formal application (i.e. where you submitted an application form or certain documents such as a business plan or financial accounts) .................................................................. Both ......................................................................................... Other (specify)______________________ ............................ 1 GO TO Q.17b 2 3 4 Q.17b What were the reasons for not making a formal application? PROBE FULLY Q.18 Were you successful in obtaining finance from __________(FROM Q.17) or only partially successful or is the decision still pending, or were you not successful? SINGLE CODE Yes .......................................................................................... No ............................................................................................ Partially.................................................................................... Still pending ............................................................................. 1 2 3 4 ASK ALL SECTION 4 – SEASONALITY Q.19 Is the turnover of your business seasonal in nature? SINGLE CODE Yes .......................................................................................... No ............................................................................................ 1 2 GO TO Q.19a GO TO Q.23 Q.19a As a result of the seasonal nature of your business turnover, is your demand for credit also seasonal in nature? SINGLE CODE Yes .......................................................................................... No ............................................................................................ Q.20 1 2 GO TO Q.20 GO TO Q.23 As a result of the seasonal nature of your business does your requirement for credit increase by more than 20% during a single year? SINGLE CODE Yes .......................................................................................... No ............................................................................................ 1 2 GO TO Q.21 Q.20b Thinking about your seasonal credit demand, what percentage above your normal credit requirements is this? SINGLE CODE Between 21 – 49% higher than normal requirements............. Between 50 - 99% higher than normal credit requirements.... More than 100% higher than normal credit requirements....... Q.21 1 2 3 Which quarter in the calendar year has the highest level of seasonal credit demand in your business? SINGLE CODE Q1 (Jan – Mar) ........................................................................ Q2 (Apr – Jun) ......................................................................... Q3 (Jul – Sep) ......................................................................... Q4 (Oct – Dec) ........................................................................ 1 2 3 4 Q.21a. Which month in this quarter has the highest level of seasonal credit demand in your business? SINGLE CODE January.................................................................................... February .................................................................................. March ...................................................................................... April ......................................................................................... May.......................................................................................... June......................................................................................... July .......................................................................................... August ..................................................................................... September ............................................................................... October.................................................................................... November ................................................................................ December ................................................................................ Q.22 1 2 3 4 5 6 7 8 9 10 11 12 What type(s) of finance would you normally require to cover your seasonal credit requirements? READ OUT - MULTICODE New overdraft .......................................................................... Increased overdraft ................................................................. Loan ........................................................................................ Invoice Discounting ................................................................. Leasing or Hire Purchase........................................................ Other (specify) ____________________________ ............... 1 2 3 4 5 6 Appendix II Data Definitions 63 The following are the principle definitions used in the preparation of this Report and in the collation and provision of data by the participating banks. It should be noted, that whilst attempts have been made in the case of all banks to provide data in accordance with the definitions below, due to system and data limitations, it has not been possible in all cases. These definitions should be read in conjunction with Appendix III – Assumptions and Limitations. Name Ref Definition A. SME Definitions The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than SME A.1 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million SME – Medium Enterprise SME – Small Enterprise SME – Micro Enterprise Within the SME category, a medium size enterprise is defined as an enterprise that employs fewer than 250 and more A.2 than 50 persons and whose annual turnover is less than €50million and annual balance sheet total does not exceed EUR 43 million A.3 A.4 Within the SME category, a small enterprise is defined as an enterprise which employs fewer than 50 and more than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 10 million Within the SME category, a microenterprise is defined as an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2 million B. Applications A formal application for new/increased credit for which new and existing customers are required to complete a formal Formal Application B.1 application form which is assessed internally by the bank or the commencement of a formal system credit application process Application Approval (Sanction) Application Decline B.2 The formal positive response to a formal application for credit B.3 The formal negative response to a formal application for credit Name Application Pending Ref B.4 Definition The formal status given to a credit application which is still awaiting a final credit decision (awaiting approval or decline) Credit applications which have been pending for a period of time (as defined by individual Banks) for which no final Application Lapsed B.5 credit decision has been made and which are considered to no longer remain as "live" credit applications and as such are not being actively considered by a bank Enquiry B.6 An informal approach by a customer / potential customer regarding a new credit facility Application Date B.7 The date in (dd/mm/yy format) on which an application is first recorded by a bank Decision Date B.8 The date in (dd/mm/yy format) on which the final decision on the application is made C. Product Definitions An arrangement in which a lender gives money to a borrower, and the borrower agrees to repay the money, usually Loan C.1 along with interest, at some future point(s) in time. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan. If loan is secured by an asset or property, the lender has the right to foreclose on the collateral in case the account holder does not pay Credit arrangement under which a lending institution extends credit up to a maximum amount (called overdraft limit) against which a customer can make withdrawals. The most common form of business borrowing, an overdraft is a type Overdraft C.2 of revolving loan where deposits (credits) are available for re-borrowing, and interest is charged only on the daily overdraft (debit) balance. If the overdraft is secured by an asset or property, the lender has the right to foreclose on the collateral in case the account holder does not pay Finance & Leasing A credit facility whereby: C.3 The lessee (customer) select an asset (equipment, vehicle, software) and the lessor (finance company) will purchase that asset Name Ref Definition The lessee will have use of that asset during the lease and will pay a series of rentals or instalments for the use of that asset The lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee; The lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price) The finance company or bank is the legal owner of the asset during duration of the lease. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership Hire purchase is an agreement whereby a person hires goods for a period of time by paying instalments, and can own Hire purchase the goods at the end of the agreement if all instalments are paid Hire purchase agreements usually last between two and five years, the most common last three years. Under a hire C.4 purchase agreement, the consumer/company does not actually own the goods until the last instalment is paid, although he or she has full use of the goods throughout the repayment period. Hire purchase agreements can be held with banks, building societies, finance companies and certain retail stores, for example, garages A method to draw loans from a company's outstanding invoices that does not require the company to relinquish administrative control of the invoices. A lending institution will review the outstanding invoices on the company's Invoice discounting C.5 ledger, and will determine the amount of loans that it will extend. Invoice Discounting as defined above relates to invoice discounting and other commercial service type products. These other products are not material enough to warrant separate disclosure. D. Sector - All data is based on sectoral codes used by CBFSAI for the credit institution quarterly return (the 'Analysis of Lending and Deposits (SEC)') which in turn are based on NACE Rev. 1 codes Section A Agriculture, hunting and forestry Name Ref Definition Section B Fishing Section C Mining and quarrying Section D Manufacturing Section E Electricity, gas and water supply Section F Construction Section G Wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods Section H Hotels and Restaurants Section I Transport, storage and communications Section J Financial Intermediation Section K Real estate, renting and business activities Section M Health and social work Section N Other community, social and personal service activities Exclusions F - Construction: Excluding F1SPEC & F2CONS – speculative and development construction carried out under contract J - Financial Intermediation: Excluding J2NBCR & J3CRUN & J5INUN &J8SPVS & J1OPEN –non bank credit grantors, credit unions, collective investment schemes, SPVs, asset-backed securities, pension funds K - Real estate, renting and business activities: Excluding K11SPC& K12PRP – speculative and developmental real estate L - Education (Schools and Colleges): LEDUCT Name Ref Definition M - Health and social work: Excluding part of M1HOSP – public hospitals are excluded, however medical practices are included N - Other community, social and personal service activities: Excluding N3CHRC & N4CHAR – churches and religious organisations and charities O - Personal (Private Households): OPERSN P - Other Local Government: PLOCAL Q - Central Government: QGOVNT R - Extra-Territorial Organisations and Bodies: REXTOB E. Other Terms Asset(s) pledged to guarantee the repayment of a credit facility, satisfaction of an obligation, or in compliance of an Security E.1 agreement. Security gives a lender or obligee a legal right of access to the pledged asset(s) and to take their possession and title in case of default on his/her obligations to the repayment of the credit facility Any new credit facility extended to a new or existing customer which requires a formal credit decision. Credit should Credit (New Credit) E.2 therefore include restructuring, transfers, splits, re-pricing etc. The definition of credit excludes interest or other flowback type transactions. This is the formal credit grade assigned to an individual customer after an initial credit assessment and can be Credit Grading Definition E.3 amended overtime as per Basel 2 rules. The criteria used for credit grading include business risk, management strength and experience and financial risk considerations such as security cover/probability of default etc. The credit grade influences the lending decision, the level of lending discretion necessary and the pricing of the credit facility. Name Drawdowns Definition( €m) Ref E.4 Definition The total value (€m) that the customer has drawn against his/her approved credit limit. It does not include account flowbacks (interest, repayments etc.) On an SME level exposure relates to the total value (€m) of lending currently extended to the SME across all credit Exposure (€m) (€m) E.5 products at a point in time including all charged interest but not interest accrued. Exposure does not include contingent liabilities and is reported gross with no adjustment for provisions Appendix III Assumptions and Limitations 64 A number of data definitions have been used in the preparation of this Report and in the collation and provision of data by the participating banks. These are outlined in Appendix I. It should however be noted, that whilst attempts have been made in the case of all banks to provide data in accordance with the definitions below, due to system and data limitations, it has not been possible in all cases Due to certain limitations that existed in the data provided to us and in the lending systems within individual banks, we have been required to make a number of assumptions in our analysis of lending data to support our analysis of the supply of credit as set out in Section 3. The following is a listing of the principle assumptions we have made and limitations noted and this report should be read in conjunction with these assumptions and limitations: • Individual banks may not capture adequate customer trading data in order to report by SME category – i.e. small, medium, micro. Therefore all analysis will be based on a single category of SME only as represented by those companies who satisfy the EU definition of an SME • Participating bank’s systems support the unique identification of credit facilities for SME specific customers. The exclusion of non SME records has been carried out either manually, through the application of weightings to categories of lending (e.g. loan book) or through the inclusion/exclusion of certain loan books • Records of enquiries for credit are generally not maintained by the banks. This is changing at present in some banks, but for the Review period, we have been unable to secure any meaningful analysis of credit enquiries • In most cases, preliminary enquiries for credit may be assessed informally by the relationship, lending or branch manager in each bank. These managers assess the merits or otherwise of the credit proposal and determine whether the enquiry is suitable to proceed to formal application stage. As such formal applications for credit may not be considered as a complete estimate of full demand for credit • Differences in decline information are apparent across the participating banks. Due to the manner in which information is captured in certain of the participating banks, declines include all formal applications made in the review period which were not approved. A limitation in this approach is that these declines therefore include applications which have lapsed (i.e. applications which did not proceed or expired due to timing reasons however this figure is immaterial in the context of overall declines) and applications for which a decision is pending. • Finance and leasing and hire purchase products are generally categorised as one type of product rather than two in most banks, and were treated as one product in the original Review at June 2009 and have been similarly treated in this Review • In certain banks a degree of estimation may be required when applying a sectoral profile to the data • The sectoral analysis/ sector codes and associated categorisation of companies will be performed on the same basis as that used for the return of data to the Central Bank for the purposes of the quarterly credit institution return (the 'Analysis of Lending and Deposits (SEC)') • In certain cases the sectoral classification may not be as detailed as the Central Bank sector codes level as this information may not always be available. As such it may be not possible to precisely exclude certain subsector codes. This may arise only in relation to low materiality products (Invoice Discounting and Supply Line Credit) and we have relied upon management assurance to guide the exclusions Applications for loans and overdrafts which represent approximately 85% of total applications cannot be separately identified in most banks, and as such our analysis has required us to consider both as one credit facility. This is of particular importance given the reliance by SMEs on overdrafts as a form of working capital finance. There were also other cases where it was not possible to split applications by product Due to limitations in individual bank lending and application systems, it is not possible to analyse formal applications fully. We cannot differentiate applications received by the banks into those received from new customers as distinct from those received from existing customers, and as such we have been obliged to conduct our analysis on a total new applications basis Due to limitations in individual bank lending and application systems we cannot differentiate between account management activities that are driven by the customer as compared to those that are driven by the bank (e.g. restructuring, reduction in facility etc.) This is important as we have been unable to identify the extent to which changes in facilities are requested or imposed Certain bank systems were unable to separately identify new applications from new and existing customers from renewals or amendments to existing facilities and assumptions were made in order to allow us to do so It is not possible to comment on trends in applications arising for renewals and amendments to existing loan and overdraft facilities due to the fact that they are not separately identifiable for the a number of banks making up the majority of the market. Our analysis of loans and overdrafts is therefore focused on applications for new credit from existing and new customers only In the application data provided it was not always possible to distinguish between existing and new customers Approval rates were calculated as follows: Positive Response to an application x 100 = Approval Rate (%) Total Applications (Including pending and lapsed) Whilst every attempt has been made by Mazars to test the accuracy and completeness of the data provided, it has not been possible to test all data in the case of all participating banks, in those case, we have been obliged to rely on assurances provided by management without independent verification.