Bank of Ireland and Allied Irish Banks will struggle to reach Government- set targets to lend €3.5 billion each to small businesses this year, according to the head of the Credit Review Office, which adjudicates on appeals from companies rejected for new loans.
John Trethowan, head of the Credit Review Office, expected the banks to make up ground towards these goals in the remainder of the year but said that "it will stretch them" to reach these targets.
The chief executives of the two banks had rejected his call for them to do more to lend to businesses in marginal cases where loans were turned down, he said.
Mr Trethowan said he had met Bank of Ireland chief executive Richie Boucher and AIB chief executive David Duffy since calling on the two lenders in June to make more exceptions to approve new loans for viable small businesses.
His biggest concern, he said, was that there were just three banks lending to small and medium-sized businesses in Ireland – the two main banks and Ulster Bank.
He was speaking after the publication of a report by two Central Bank economists which said Ireland had the second highest rate in the euro zone for borrowers who needed loans but were discouraged from applying in the belief they would be rejected.
This contradicted an earlier Government-commissioned report which showed that a much lower level of borrowers were discouraged from applying for loans.
Irish Banking Federation president John Reynolds said the banks were not attempting to make their lending figures better than they actually were but he conceded lenders needed "to keep probing" to find out why firms that required credit were not applying for loans.
"I don't believe it is an attempt by the banks to paint a rosier picture. We are in the fifth year of this crisis and it is in our interests to paint the picture as it is," said Mr Reynolds, who is head of KBC Bank Ireland.
The higher level of loan rejections reflected the tougher economic environment and how difficult it was for firms to be creditworthy, he said.
The Central Bank report found that banks were twice as likely to refuse loans to small businesses compared with the average level across euro zone countries. The banks will come under further scrutiny today as the latest figures for the number of mortgages in arrears are due to be published by the Central Bank.
The figures will cover arrears to the end of June, a period for which Bank of Ireland and AIB have already reported increasing levels of missed mortgage repayments among borrowers on last year.
The latest report on lending to small and medium-sized firms has reopened the long-running debate about whether the banks are open for new lending to businesses.
The banking federation rejected the Central Bank report saying that it was at odds with a report by accountancy firm Mazars backed by the Department of Finance. The Central Bank report said almost 15 per cent of borrowers were discouraged from applying for new loans, compared with 6 per cent in the Mazars report.
The banking lobby group said the Mazars report took in a bigger survey sample and showed banks were meeting their requirements.
One of the authors of the Central Bank report, Fergal McCann, said that regardless of whether the euro area or Mazars figures were used, Ireland was second, behind Greece, for the highest level of rejections on loans to small firms.
AIB responded to the report saying it was 17 per cent ahead of its year-to-date target to meet the €3.5 billion in new loans for 2012 but declined to say how much of this related to converting existing overdrafts into term loans.
Converting debt into longer-term loans was equally beneficial to companies, said Mr Reynolds.
Bank of Ireland said it was a concern that a significant number of firms still believed banks were not lending and that steps needed to be taken "to encourage businesses to seek borrowing if required".
