ANALYSIS:The review office asked just one bank to reconsider loan refusals in only two cases out of 12, writes SIMON CARSWELL

THE STATE’S two biggest banks are not constraining new lending to small firms or farms but could do more on the front line to help and communicate with struggling customers in the small and medium-sized enterprise (SME) sector.

This was the main message in the first quarterly report by the Government’s independent Credit Review Office, which was set up to assess whether banks are unfairly refusing credit for SMEs.

The Credit Review Office, led by 35-year banking veteran John Trethowan, asked a bank to reconsider a loan refusal in just two cases out of 12 loan decisions assessed between April and June.

In a third case, he said that more work was required by the bank and borrower. All three cases involved Bank of Ireland.

Minister for Finance Brian Lenihan stressed the importance of ensuring that the two banks – recapitalised with €7 billion in taxpayers’ funds – continue to lend as the economy begins to recover in the latter half of this year.

“Unless our banks lend to viable businesses, our economic recovery will be stunted,” Mr Lenihan said.

AIB and Bank of Ireland have each agreed to lend €3 billion each in both 2010 and 2011 to SMEs.

While this €12 billion total for both years is not new – the banks and the Government have previously disclosed this target – their commitments are now legally binding, as both banks have had their plans signed off after recapitalisation.

AIB and Bank of Ireland will have to provide monthly reports showing that they are meeting their commitments on SME loans.

The new lending was “not prescriptive” to cover a particular region or sector, Mr Lenihan said.

The Minister can, under statute, compel the banks to lend to SMEs, but individual credit refusals must first be reviewed by the banks before going to Mr Trethowan, who can then inform Mr Lenihan.

Mr Trethowan acknowledged that the initial work of his office had been slower than anticipated as loan refusals first had to be reviewed by the banks themselves. However, his review of lending practices and the experiences of businesses was more revealing.

AIB and Bank of Ireland were the only banks “in the Nama stable” lending to SMEs. They were covering 60 per cent of the market and filling gaps left by Anglo Irish Bank and Irish Nationwide, which have stopped lending.

There was “a definite silence” among the foreign banks in Ireland when it came to SME lending. Customers at Anglo, Irish Nationwide and most of the foreign banks have complained that they cannot access credit, he said.

Mr Lenihan said Ulster Bank was committed to Ireland, but it was a case of “once bitten, twice shy” for other foreign banks which had injected large sums into their Irish banks to cover losses on property.

Property had sucked in SMEs too, Mr Trethowan said. They had bought investment properties and borrowed heavily on them, using their capital which they otherwise could have used “to stay afloat” and are now turning to the banks.

“You can appreciate how difficult it is when a bank is being asked to completely save a business,” he said.

Undoubtedly, the banks are reluctant to provide capital to struggling businesses that had cleaned out their reserves for property investments or to make up the shortfall on sales lost during the recession.

But the big banks do see SME lending as a way of earning a return for their shareholders, which now include the State. Given that AIB is shrinking by selling off overseas business, the bank’s future depends on recovery and growth in the economy.

However, with one-third of SME loans either on watch or impaired, according to accountants Mazars, it’s no surprise that small firms are struggling to secure new loans.

Mr Trethowan’s office may not improve matters for SMEs but it will help create a certain level of transparency and confidence in the banks’ loan approval process.