Mr. Felix O'Regan:

I welcome the opportunity to give this presentation. I regret that there was confusion over the October meetings when we were first scheduled to appear. There was a miscommunication and misunderstanding on our part. I hope my presentation will provide a helpful picture of the broad SME environment and set the context for the question and answers session to follow. The committee have seen the slides which I propose to go through and I will make some key points.

The first slide is from a publication we produce with DKM Economic Consultants. It is designed to give the broad canvas picture for the SME sector, including how it is doing and what are the positives and negatives. It covers 15 economic indicators. We carry out this examination twice a year. It gives a good backdrop which we share with all the business organisations. The key points in this slide are that the majority of the indicators are positive for the SME sector. Those are the green arrows indicating upwards. Some of the arrows are red and are tracking downwards but that may have as much to do with seasonal factors as anything else.

I note a summary comment on the last report produced by Annette Hughes who said that with Brexit negotiations ongoing amid corporate tax proposals and developments in the USA, the Irish economy faces uncertain times. Nonetheless, the report stated, the economy continues to perform well in terms of domestic demand, positive SME lending and production levels.

I will move to the next slide, which seeks to present the picture regarding access to finance, an area on which the committee has a particular focus. This is a Europe-wide survey. Interestingly, it shows that while access to finance is on the list of challenges for SMEs, it is not by any means top of the priority list for them. As the slide shows, finding customers, the availability of skilled staff and competition in the market for the products and services they provide are the priority areas. It is not that access to finance is not on the list but it is notably and considerably down the list of challenges and priorities. It is also notable that the picture for the EU as a whole is broadly similar to what the survey shows for Irish SMEs.

The next slide shows the sources of finance for SMEs and the key message is that there is, again, a similarity between SMEs in Ireland and their counterparts across the EU area. There is a focus on short-term finance, including overdrafts and credit cards, as distinct from longer-term bank loans. This is something that it is important to note, as is the similarity in broad terms between SMEs here and elsewhere in Europe. With the next slide, I seek to show the range of choice and service providers servicing the SME finance market. At the top, one has the two quartiles which fully represent the banking sector. All of the names there are members of our federation and household names in banking terms. There are domestic and some international banks. The lower quartiles are representative of the non-banking sector, but these finance-providing businesses and organisations play an increasingly important role in a competitive market. The point to be drawn from this slide is that when we talk about competition and choice, we have to view things in terms of the part banks play and the role non-banks play. Often, their roles are complementary and supplementary. There is also some State funding, including the Strategic Banking Corporation of Ireland and Microfinance Ireland. I will say a bit about that when we come to a later slide.

The next slide comes from another EU-wide survey that asked lenders about their expectations of where the demand for credit was going. Over the recent quarters from 2016 into 2017, they have been saying they have the sense that over that period, there was an increased appetite for borrowing on the part of SMEs. That would certainly have taken us up to the middle of 2017. Expectations were that the demand for credit would rise and perhaps steady off somewhat.

The next slide shows what credit has actually gone into the marketplace using figures from the Central Bank. The picture that emerges is that there was a significant increase in bank lending to the SME sector through 2016 and into 2017. However, at the top of the tail, members will see a plateau and even a slight reduction. These figures emerged from the Central Bank only a few weeks ago and they led analyst Conall Mac Coille at Davy to say this was not too surprising with business credit demand and sentiment surveys softening since the Brexit referendum in the UK. As such, there is no getting away from consideration of the impact of the Brexit referendum. The slide shows that the stock of credit outstanding is actually falling. It is falling, not because more lending is not going on, but because of the rate at which businesses have been repaying debt. This is the second, smaller graph on the right which shows a continuous increase because businesses are deleveraging. They are getting debt off their balance sheets as much as possible because they want to get back to an even keel and a healthier state of affairs. In fact, the latest figures show that the level of debt has fallen by 42% between December 2011 and June 2017.

The Central Bank also noted that the percentage of highly indebted SMEs, which used to be as much as 7.7% of the total SME population, has now gone down to 2.9%. The picture of reducing debt levels is a healthy one.

At industry level, there are several factors which need to be considered when looking at the demand for credit. There is uncertainty around Brexit and it appears to be impacting on business confidence. I would not overstate it but it is a consideration. In the years after the financial crisis, SMEs needed to borrow for just about everything, even for paying wages and day-to-day ongoing costs. They have come through this part of the cycle, meaning that their demand for credit is not as pronounced as it would have been immediately after the crisis. There is a nervousness about debt, a legacy of the financial crisis, even among those SME proprietors who were not exposed to debt. Businesses have the cashflow and reserves on which they will draw. While there is an uplift in the demand for and supply of credit, there are other factors at play which explain why there is a slight constraint coming into the market of which we need to be conscious.

Indirectly, the banking sector provides significant support through two organisations. The Social Finance Foundation, entirely funded by the banking sector through a donation of €25 million in 2007, supports community enterprises, community halls, sports clubs, crèche facilities and so forth. A subsidiary of this, Microfinance Ireland, gave €18 million to 1,300 micro-enterprises between 2012 and 2017. These are the sort of micro-enterprises that, for whatever reason, do not readily qualify for loans from mainstream banks. While the banks might not always be in a position to support micro-enterprises directly, they can finance them through Microfinance Ireland.

As a representative body, it is not appropriate for me to talk about product pricing or interest rates, which are competitive issues. Access to credit is a challenge to SMEs but it is not on top of the list. The range of bank and non-bank supports is extensive. When we look at competition and choice, we need to look at the broader canvas. The demand for credit has been strong and significant until recently. It seems to have plateaued. We are all looking at trying to establish the reasons for this. We have been talking to business representative bodies, along with the Credit Review Office and Mr. John Trethowan. If there is a rationale for joint messaging to go out from all of us about the benefits of sensible and productive borrowing, we would be happy to subscribe to it.