The Irish Banking Federation has rejected the findings of a Central Bank report that claims Ireland is second only to Greece in terms of refusing loans to small businesses.

The Central Bank report published this morning found that Irish banks reject more business loan applications than any other state in the euro zone except Greece, with small and medium businesses in Ireland twice as likely to have a loan application turned down as the average across the region.

Speaking on RTÉ Radio One this morning, chief executive Pat Farrell said the report did not compare like with like, as the surveys had not been carried out according to the same templates across the euro zone.

“The definitive report on this area is the Mazars report, and that sets out clearly the fact that banks are lending to small businesses,” he said.

“We now have a situation where the Department of Finance and the Government is definitively standing behind the Mazars report, and now we have this report coming out of the blue sky from the Central Bank which on the face of it seems to be saying something completely different,” Mr Farrell said.

However, the Central Bank report is based on the Mazars report.

A spokesman for the IBF later said the group had some fundamental concerns about the report and it would require further analysis. He cited the size of the sample used in the study, and also raised questions about whether the asset quality of the those applying for loans had been analysed.

The report found that more than one in four businesses seeking a loan or an overdraft were rejected in the six months to March, more than double the euro average and compares with one in 28 in Germany.

While some teetering businesses which seek credit have little chance of repaying loans – and thus have to be refused them – the new study says that “high rejection rates in Ireland cannot be explained by the quality of the pool of potential borrowers”.

A related finding that will raise hackles in the business community is that, within the euro zone, Ireland has the second-highest share of “discouraged business borrowers” (companies that do not apply for a loan despite requiring credit, for fear of rejection).

Proportionately, the number of discouraged borrowers is double the euro area average.

The IBF has attributed drastically reduced new loan issuance to weak demand from small and medium-sized enterprises (SMEs).

Today’s report finds that this claim is dubious.

The country’s largest group of financial brokers PIBA said the report "lifts the cloak of pretence" surrounding bank lending.

"The findings in today’s report are indisputable. The tragedy is that it has been going on for far too long and indeed worsened in the first quarter of this year over the last quarter of last year," said Rachel Doyle chief operations officer at the association.

"Now that the Central Bank’s own report confirms the reality, it is to be hoped and expected that they would act to bring about change rapidly."

Chambers Ireland said the report highlighted that Ireland had some of the “harshest lending conditions” in the euro zone and it was concerned “at the high level” of businesses not applying for loans for fear of rejection.

It said it was time for the Government “to agree its line on lending conditions and ensure that all banks follow suit”.

“The Government needs to set the standard for lending through the terms of its Enterprise Loan Guarantee Scheme which must be implemented without further delay,” Chambers Ireland deputy chief executive Seán Murphy said

As measured by businesses’ reported need for bank financing, credit demand in Ireland lies marginally above the euro area average, according to the study.

The research also finds that Irish SMEs have suffered changes in terms and conditions of bank credit – such as interest rates, collateral requirements and sizes of loans – that are among the harshest in the euro area.

The report states that a decline in credit of the kind currently being experienced “arguably requires more immediate action, given the potentially serious impact on economic growth”.

“International literature has found that credit-constrained firms are more likely to close down or shed employment, less likely to invest in technology, spend on marketing, or enter export or import markets,” the study says.

The report, Irish SME Credit Supply and Demand: Comparisons across Surveys and Countries, was authored by Central Bank economists Sarah Holton and Fergal McCann.

Previously published figures cited in today’s report show gross new lending to SMEs amounted to just €407 million in the first three months of 2012.

This represents a decrease of almost one-third on the previous quarter and a 42 per cent fall on the same period in 2011.

By March 2012, the total volume of credit outstanding to companies outside the property and financial sectors had fallen by one-third in three years, from €60 billion to €40 billion.

One of the few positives in the report is the finding that credit conditions for SMEs were slightly less bad in the most recent survey period (the six months to March 2012) than in the previous period (the six months to September 2011).

However, even this comes with a qualifier. “Ireland remains in a very unfavourable position relative to the euro area average,” the study states.

In a statement, AIB said it considered SMEs "critical" to the Irish economy for the maintenance and creation of jobs, and said the bank was "acutely aware" of the need to supply credit tot he sector.

"It is a matter of major concern to the bank that a perception continues to persist among many Irish SMEs that they cannot approach banks for credit," the bank said.

AIB said it had exceeded its target for lending to SMEs of €3 billion in 2011, anjd was already 17 per cent ahead of a €3.5 billion target set for 2012.

"We fully recognise that today’s credit process is more extensive than it was in previous times. We believe this is appropriate and is in no way meant to be an obstacle to obtaining credit," the bank said.

Bank of Ireland said it had approved 80 per cent of the applications received for credit - some 27,000 out of 33,000 – in the six months to the end of July.

"Bank of Ireland continues to lend to viable Irish businesses and farmers and is keen to see more applications coming from this group," Bank of Ireland business banking director Mark Cunningham said.

He said it was "a concern for us" that a significant number of SMEs believed banks were not lending.

"Research from the Mazars Study suggests that these SMEs are forming their views from the information they receive from a wide variety of sources rather than their own personal experiences," he said.

The report compares survey responses on Irish SME credit supply and demand in different surveys and in different euro area countries.

The survey data used in the study comes from the European Commission and European Central Bank Survey of Access to Finance of Small and Medium Enterprises and the Mazars SME lending demand survey.