Oh dear. Those heroes of the credit crisis, the credit ratings agencies, are back. Excuse the sarcasm, but did we really need to read this week that the S&P ratings agency gurus have put the three big Irish banks on negative watch? Think it best we save our gratitude and equate this post-factum analysis to a service scenario where the Red Cross returns to the battlefield to shoot the wounded.

There is no doubt a global pandemic and recession will inflict wounds on our banks. The good news for taxpayers is the banks are in much better shape than 2008. The bad news for small businesses is that the banks will be so busy firefighting there will be no time to build new banking relationships and source funding capital. In an Irish context, the reality is our corporate banking network is sub-scale and our small business sector (SME) is massive. That ‘massive’ adjective might surprise but the numbers don’t lie and come straight from the Central Bank.  See for yourself…

  • More than two-thirds of private-sector jobs (1 million) are in SMEs.
  • Trade credit in the Irish economy is unusually large as a percentage of overall economy. Outstanding trade credit liabilities amount to a whopping €250 billion.

But there’s a problem……

  • Trade credit is used by up to 80% of Irish firms as a source of financing. This compares to 40-50% levels in the average European country.
  • Undrawn credit/bank facilities amount to just €2.7 billion.
  • Currently 60% of SMEs have NO debt.

Clearly, interruptions to the normal flow of €250 billion worth of trade and payments are going to be significant multiples of the €2.7 billion of funds/facilities currently set-up by the banks. The fact that 60% of firms have no previous lending relationship with a bank is another challenge. For illustration, check out one of the working capital support schemes set up by the government, with the banks as chosen administrator. Press reports this week show just €17m drawn down from a potential €250m pot, and only 100 borrowers actually being accepted on the scheme. The experience is somewhat similar in the UK where approval rates in the CBIL scheme are just over 2%!

While funding and vaccines are scarce there is no shortage of opinions as to what is the best form of funding (loans, grants, equity) or the appropriate risk sharing between SME, bank and taxpayer. In this writer’s opinion any funding detail is moot without an appropriate execution plan and platform. These pages have never been particularly kind to the banking sector but in the midst of a global pandemic there is clearly no point in shooting the corporate wounded.  What would be helpful would be an honest communication from our banks that they do not have the resources on their own to execute an aid programme for the SME sector.  Just like the Revenue was cleverly employed to administer payroll/cash flow relief in the early stages of this crisis there now needs further innovative and original thinking.

Would it be too bold to ask the fintech sector and their speedy execution platforms to assist? In pandemic parlance, SMEs are effectively already in the ICU unit. Speed of action is now critical. And there are 250 billion reasons to warn this is a very very big problem for the Irish economy. Just thinking, and hoping.

 

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