Damien English (Meath West, Fine Gael)
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I welcome Mr. John Trethowan, head credit reviewer, and Ms Catherine Collins, deputy head credit reviewer, from the Credit Review Office, and Mr. Pat Farrell, chief executive, and Mr. Felix O'Regan, director of public affairs, from the Irish Banking Federation. We appreciate their attendance here today.

Before we begin, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(I) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him or her identifiable.

I now invite Mr. Trethowan to commence his presentation, followed by Mr. Farrell. Members will then put their questions.

Mr. John Trethowan:

The Credit Review Office has been in existence for just over two and a half years. We believe we have ensured that SMEs in Ireland have access to credit from the pillar banks, which was our mandate from the Minister when the office was established. I have sent a background briefing to the committee on the work of the office.

Over the past two and a half years, we have assisted approximately 200 businesses with credit appeals, and we have been able to help approximately 55% of those businesses to get access to credit. For the remainder, for which we agreed with the banks' decisions not to lend, we have tried to suggest alternatives to bank lending, such as the First Step Microenterprise Network, which has now become the microenterprise loan fund. In other cases we have suggested asset sales to help improve the balance sheets of the businesses. We have always tried our best to assist. The office has made observations on both the supply and the demand side. We have pointed out where banks can do better and where small businesses can do better. We have also tried to comment on the condition in which some small businesses have found themselves after such a long period of poor domestic demand.

In addition, I was given the task of monitoring the banks' loan sanctioning targets - €3.5 billion per year for each of the two banks. Each month the banks report their figures to me, and once they have been collated they are forwarded to the Department of Finance. We meet the banks formally on a quarterly basis to discuss progress on the targets and try to improve the quality of reporting.

That was a brief overview. I will be more than happy to answer any questions.

Damien English (Meath West, Fine Gael)
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Thank you. I now call on Mr. Farrell to make his presentation.

Mr. Pat Farrell:

I thank the Chairman and committee members for the opportunity to make a presentation today. I will talk briefly about the SME sector to provide some context. Some 99.8% of businesses in Ireland are small and medium-sized enterprises. Therefore, the sector is a cornerstone of the economy. It is worth noting that more than half of SMEs - which employ 900,000 people - were established in the past ten years and are very new in terms of operating experience. Employment is concentrated in the domestically focused sector, which we are aware has taken serious hit. Some of the areas hit are distribution and retail, accommodation, food, tourism and construction, which is on the floor. This is quite different from the typical SME profile across the European Union.

The next slide deals with SME use of bank credit. It is useful to highlight the difference between ourselves and our European peers. Looking at how SMEs use bank credit in the form of term finance, we can see that Irish SMEs are about mid-table compared with other European countries. When it comes to the use of overdraft facilities, however, we are top of the table. It can be seen that there is a big reliance on overdraft facilities among Irish SMEs. Six out of ten businesses say they have used overdraft facilities in the past six months, far more than in any other country. Generally, Irish SMEs' use of bank credit is significantly higher than in other countries.

Mr. Trethowan was fair in mentioning the issues that face banks in terms of improving their performance, and those that face SMEs. The main challenge for SMEs is weak demand in the domestic sector. People starting a business in 2007 would probably have based their business model on 25% growth in the economy between then and 2012. Instead, the economy has shrunk by 25%. That is a cataclysmic drop in domestic demand, which is bound to have a severe impact on SMEs that are primarily focused on activity in the domestic economy. Few of them are exposed to export or external demand.

Another problem is that many SMEs are under-capitalised and, as their primary problem is capital, they have had to drain either owner capital or other sources. Banks are not primary suppliers of capital. A further problem is that microenterprises face particular challenges. Help is on the way in that respect and we will talk later about the establishment of the micro-finance fund. These companies tend to be younger and smaller in profile and they find it harder to make a pitch in terms of meeting the requirements when presenting business plans to access credit.

The big challenge for banks, on which they continue to work, is to ensure they have productive engagement with customers. This means that customers with sustainable businesses need to approach the banks. It is a myth that banks are not lending and it is a myth that if a business approaches a bank and is turned down, that is a blot on its copybook. It is not, as will be verified by Mr. Trethowan. Another challenge for the banks is to increase our understanding of growth sectors. Many new sectors are emerging in the Irish economy in the software, life sciences and green technology areas and significant work is being done by banks to improve their skills and understanding in those sectors so they can lend to these businesses.

A problem I referred to at the outset is that of rebalancing the debt-equity ratio and finding ways to get more capital into banks. John Moran, the Secretary General of the Department of Finance, spoke about this recently at a conference, referring to the need to find models to bring more equity into SMEs.

If we look at the nature of credit demand we see that the principal requirement for credit for small and medium-sized enterprises is for renewal or renegotiation of existing credit facilities and not for new credit facilities. That is very understandable. In fact, it would be illogical if it were otherwise, given the level of reduction in demand in the domestic economy, which is effectively the driver of activity in these businesses.

There has been considerable debate about what constitutes new lending and whether renewal of existing facilities matters at all or is value-adding. I contend, as does the Credit Review Office, that the renewal of credit facilities is very important for existing businesses. I have two case studies to illustrate that point. These are drawn from real-life experiences but suitably anonymised. Take a company that has an existing loan of €2 million, upon which repayment is due at the end of the month. It cannot make that repayment in time. The company is effectively in breach of its covenant and the bank can either call in that loan or refinance it with new contractual obligations. If the bank calls in the loan because of inability to pay, it will lead to the business folding with the loss, in this case, of 30 jobs. The bank decides to refinance the loan for a longer period of time and puts a new contract in place, which means the business can continue to trade and the 30 jobs are secured. That is not simply a paper transaction by a bank. That is a conscious decision by a bank to stand back, examine a business which is unable to fulfil its original contractual obligations and make a commitment to refinance that business. That is critical because if such decisions were not being made, the unemployment problem in this country would be much worse than it is at present.

The second case study involves a company which has an overdraft of €100,000 and a loan of €1 million. The company cannot make the loan repayments and the overdraft is at its absolute limit. Again, the bank is faced with the choice of calling in the credit facilities or restructuring the loan as interest-only. In this particular case the bank sat down with the customer, restructured the loan facility on a new, two-year, interest-only basis and, as a result, the monthly repayment is substantially reduced. That is freeing up cashflow in the business and, in turn, reducing the pressure on the overdraft facility, allowing that issue to be addressed over time, given that the business is sustainable in the longer term. The business and economic impact of the renewal, restructuring and renegotiation of credit facilities is every bit as concrete and valuable as new credit facilities. It is as important for an existing business that needs it as new investment is to a new company starting up.

On the issue of SME use of bank credit, members will know the figures, which were covered by Mr. Trethowan. I will not go into detail on them again but we have data on the amount of money that has been extended to SMEs in the past year, the amount that is outstanding and the amount available through overdraft facilities, which is in excess of €2.5 billion.

It is important to examine the use of bank credit. Mr. Trethowan spoke about the number of cases examined by the Credit Review Office this year, and it must be acknowledged that the office fulfils an essential role. In the first nine months of 2012, however, banks approved more than 80,000 applications for credit for SMEs. That works out at 2,000 credit applications from SMEs being approved by the banks each week. That is a substantial amount of activity by any measure. Less than 50% of the approved overdraft limits that are in place are actually drawn down. In other words, there is a further €2.5 billion in overdraft facilities that have been approved but are not used by customers.

Mr. Trethowan also spoke about challenges for businesses, and one of the biggest of these is good planning and financial management. Approximately 53% of SMEs were established in the past decade, so they are young, inexperienced businesses. Some of them have not gathered the kind of experience they need in these current times in terms of meeting the requirement to put together a proper business plan in the format required by banks. We are working with businesses and accountants to try to close that gap.

Those who put money into a business, be they investors, banks or Government agencies, need to know how the money will be used, the potential of the business to succeed and the prospects of them getting a return for their investment. That requires a very robust business plan and, in some cases, one of the difficulties in sanctioning loans is that the business plan falls short. In some of the cases reviewed by the Credit Review Office, the subsequent approval is based on additional information supplied by the business. The most recent Department of Finance Mazars survey showed that many small businesses need to do more to show their business is a good proposition either for an investor or for financial support. Management experience is also very important and is a key indicator of whether a business will be able to pay back its debts.

As I have said, each SME is different. Indeed, the Central Bank recently highlighted the importance of treating each SME on its own merits and examining them on an individual basis. Measures such as liquidity and current ratios, the level of trade debtors and profitability are quantitative factors, but qualitative factors are also very important, such as how much experience the management has at running the business. The default rate falls as a firm's size increases, measured by turnover, and rises as loan size increases, which is a measure of risk. Particular attention must be paid to the financial health of small firms or microenterprises and borrowers who have large exposures. There is a very high level of distress across the lending already in place for SMEs, and that must be a factor in making decisions about advancing further credit to individual businesses.

The Irish Banking Federation employs 16 people. We have a limited, but important role to play and we try to be solution orientated. We work very closely with those in the Credit Review Office and others in the stakeholder landscape. We have done a number of specific things, on our own initiative, to address some of the issues raised by Mr. Trethowan in successive reports and which we have identified ourselves in discussions with other stakeholders and our member banks. I will ask my colleague, Mr. Felix O'Regan, to elaborate because he was centrally involved.

Mr. Felix O'Regan:

We have been trying to supplement what the banks are doing at the coalface in terms of lending. We have tried to ascertain whether there are information or resource gaps, identified by ourselves, the Credit Review Office or other stakeholders, which can be addressed. In that regard we worked with Chambers Ireland and developed a new website, www.smallbusinessfinance.ie, which has already had 26,000 page reviews. It is increasingly seen as a one-stop shop for information for all small developing businesses, not just about getting finance but also about all the other supports that are available. It has been fully endorsed by the Department of Jobs, Enterprise and Innovation and the Department of Finance. Most recently, the new Microfinance Ireland initiative has adopted and promoted it throughout the network of county enterprise boards. Small businesses are being directed to our website for further information.

We have worked with accountants to develop a business plan guide. One issue we encountered and which was flagged by the Credit Review Office and others was that businesses had difficulties with the variations in documentary requirements of different banks. When they went to one bank seeking credit, they were asked for certain things to be included in their business plan, while another lender would tweak this. We worked with all of the banks and with accountants to come up with a blueprint for a standard business plan for SMEs applying for credit to any lending institution. We have developed that guidance which is now being used throughout the country by accountants, in conjunction with small business clients.

We also worked with the Credit Review Office to develop a standard credit application form. Again, in the past there were slight differences between one institution and another. This was very much an initiative of the Credit Review Office but we sought to fine tune that and to drive it out, not just to the pillar banks but also to other lenders in the market.

We are also working with the Government and I have referred to several of the initiatives. We support Microfinance Ireland as an initiative and there is also funding from the banking sector to complement the Exchequer funding. The first loan applications from Microfinance Ireland have been received. I sit on the board. Following the two board meetings that have been held, we have much confidence about the degree to which we believe businesses in localities working through the county enterprise boards can be helped from a start-up or developing phase. The Social Finance Foundation was the precursor to Microfinance Ireland. A total of €25 million in equity capital was made available from the banking sector in 2007. Slide 13 shows what the Social Finance Foundation has been doing during the past four or five years. Community enterprise projects, small enterprises and local projects have been supported. One can see within that initiative how approximately one quarter of the funding has gone to microenterprises. In truth much of that will probably be taken over by Microfinance Ireland in future. However, a total of €10 million has gone into the microfinance sector as a result of bank low-cost funding. These are the initiatives. I would be pleased to take any questions later on.

Mr. Pat Farrell:

To summarise, we are working with small and medium-sized enterprise customers to get them the credit they need. We are approving more than 2,000 applications for credit each week. The member banks and ourselves are working with customers to give them the best chance of accessing finance. Where we see deficiencies and where issues are pointed out to us, we work with all best intent to try to close out those issues or to improve the situation. It is not all about new lending. Renewing or renegotiating credit and working capital finance are what many businesses need. Banks are working to meet that need. Getting finance to businesses depends on addressing a range of issues. It is not only about bank debt. Access to capital and equity, the experience of the business owners and their ability to manage the business in question are also relevant.

It is critical to have a positive environment for credit availability because that will help to drive demand and support growth and job creation. If we continue to maintain that banks are not open for business or not extending credit, it will become a self-fulfilling prophesy. It will become the reality. Our job and that of the Credit Review Office is to ensure we get the message out loud and clear to business operators that if they have a sustainable business and they approach their bank, they will get access to credit. If business operators are aggrieved about a decision, they have the backstop of the Credit Review Office which will independently assess an application and determine whether the decision should be upheld or refused. I thank the committee for its time.

Dara Calleary (Mayo, Fianna Fail)
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I thank both organisations for coming in today and for their ongoing help in our day-to-day existence. Having said that, the presentations are altogether at variance with what we are dealing with. In page 2 of his presentation outlining his observations of the banking market, Mr. Trethowan stated that the centralisation of credit decision making taking place, coupled with the reduction of many rural branches and the continuing churning of front-end staff, has led to many SMEs feeling isolated and remote from the banks. That is a rather diplomatic way of putting it. I have questions for both organisations and I will turn over and back.

Mr. Trethowan also stated in the two previous reports that he has encouraged banks to do more to support enterprise-type lending. His view is that a low-risk appetite and overly tight lending policies have gone too far to ensure that new lending and future loans do not cause a repeat of the recent past. He also stated that excessive prudence may risk banks not fully supporting an economic upturn when SMEs require access to more working capital to invest. Will Mr. Trethowan expand on that, please? Will Mr. Farrell respond to those two comments from the Credit Review Office?

The survey referred to the level of credit for SMEs as 37%. However, the Central Bank published Irish SME credit supply and demand: a comparison across surveys and countries. This was a presentation of research by Sarah Holton and Fergal McCann. It stated that Ireland has the second highest rate of discouraged borrowers in the eurozone. These are defined as firms that do not apply for a loan despite requiring credit. We all know that. We know people are not submitting applications and that they are advised by the relationship manager in their bank not to bother because it will not happen. What measurement does the Credit Review Office have of that? Is there any system in the Credit Review Office to review what the Central Bank says about discouraged borrowers? Will Mr. Farrell and Mr. O'Regan comment on that finding? Where in the system are we tracking these customers and their need for credit? It appears they are not coming into the system.

Mr. Trethowan remarked that some sanctioned term loans take some time to be drawn down. Will he outline some more of his knowledge in this regard? Part of the reason they take some time to be drawn down is the fact that more hurdles than in the Grand National are put in front of businesses before they can complete a loan or complete a revision of a loan. I know of cases lasting seven, eight or nine months from the time a loan was initiated and they are still on desks. We hear of this every day from the business organisations and businesses. Is there any sense among the deputations of introducing some time limit such that if information is not supplied then the loan is deemed dead, everyone moves on and it is not treated as an outgoing application?

Mr. Farrell referred to Ireland's credit trends in the context of the eurozone. Will he provide the United Kingdom figures as well? Many organisations like to provide a comparison of Ireland in the eurozone. We share a currency with those countries but not much else. Our way of doing business bears greater similarity to Northern Ireland and the United Kingdom rather that the rest of the eurozone. Is there any chance of the Irish Banking Federation providing those figures as well?

Mr. Trethowan's first point related to the alienation of businesses from the banking system. I refer to Bank of Ireland's so-called bank of the future policy. "Bank of the future" is Bank of Ireland's phrase. Initially, the idea is to target small businesses, including retail and hospitality businesses, with a turnover of €20,000 or more. The bank is assigning days that these enterprises are allowed to lodge. On other days they are not welcome to lodge money, including coins and cash. They bring cash or coins to the bank via four suggested security organisations, those we see around the town, a service for which the businesses must pay. On other days they are informed that they cannot lodge money. They incur the cost of bringing money to the bank. For example, if a business operator normally lodges on a Monday and he is instructed to lodge on Tuesdays, he misses the day that money normally hits the bank account and the day when he has the ability to deal with the takings from the weekend straight away. If there was one example of Mr. Trethowan's initial comment about the alienation from the banking system, that is it. These banks are closing branches and cutting the number of desks available for cash and coin transactions. One cannot lodge coins through a machine.

All the business organisations have been before the committee. Chambers Ireland will be before the committee presently. Its view is of a system completely disconnected from the reality of businesses. The Irish Banking Federation can produce all the figures it wishes but it is rather like a college lecturer. The theory is great and I have no doubt it is happening. Mr. Farrell referred to 80,000 credit applications, but what was the total number that applied? What was the overall amount? There are people here from every part of the country. There is no sense of reaching out to local branches, in particular on the part of the two pillar banks.

Mr. John Trethowan:

There are many points to cover but I will do my best to cover them. The Credit Review Office deals solely with credit, not banking services, but I can comment on access to credit through the bank networks. One of my key concerns is that we are down to three active banks which are making loans to SMEs in the market.

Some of those are now contracting their physical presence also.

The traditional model of relationship banking has gone, which is much regretted by the business sector. I chaired a focus group at an SME event for Europe in Croke Park two weeks ago, after which I wrote to Mr. Pat Farrell and the three bank CEOs to give them feedback. That is where I picked up the direct sense of remoteness from the banks.

Senator Feargal Quinn speaks as a bank customer. It would be great if some of the bank directors and executives began to listen to what their customers are saying. They do feel remote. I got the sense that neither the banker nor the customer is enjoying the experience of interfacing about credit decisions. I have written to the three banks and to Mr. Farrell to let them have that feedback.

I agree with what Mr. Farrell says about risk appetite. A reasonably well-run and well-capitalised business that puts a good case to the bank will have a loan sanctioned. In the reports we get from the banks, the monthly sanction levels are very high on the formal applications they deal with. However - and this is where the Credit Review Office comes into play - on a risk continuum from no risk at 0% to total loss at 100%, customers in the first 60% are being serviced by their banks. They may have a clunky interface and a long process but they are getting their money. The Credit Review Office has been active in the area between 60% and 85% risk, where the loans are more challenging and do not fall within current bank lending policies. Even where we can show that cash is being generated to repay debts, if they do not tick the boxes on current solvency, gearing - which is the stake of the borrower - and security, the loans are being declined. It is in such cases, in 55% of the loans we see, that we are managing to recommend that the banks make the loans. We are not asking banks to lend money that will not be repaid. Enough of that has happened already. There is, however, an over-rigorous application of lending policy in some cases.

Following the forum held in Croke Park two weeks ago, we are getting more and more reports of systemic serial requests for information when a loan is being made, which stretches out the period of the loan. The code of practice for SME lending and section 2(10) of the Act that set up the review office suggest a time limit of 15 working days for making credit available. These serial requests are stopping and starting the clock the whole time. In one of the meetings with SMEs I attended up the country I heard this described as "the slow no". I have written again to the banks to point out that these systemic information requests are irritating borrowers.

The good work done by Mr. Farrell and Mr. O'Regan with the chartered accountants to embed the common application form, the common business plan format and the common cashflow analysis will be helpful. We need to take this forward now and work with the accountancy bodies and the county enterprise boards to ensure they understand that this is out there and how to use it. We hope to help improve the capacity of businesses to borrow by getting this embedded more widely in the community. It is still a work in progress.

The Central Bank figures on demand are taken from a wide European survey with a relatively small number of SMEs. The Credit Review Office asked that we survey the demand in the Irish market among SMEs. That was previously done by Mazars; it is now being done by RedC.

Dara Calleary (Mayo, Fianna Fail)
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The Central Bank takes figures from Mazars as well.

Mr. John Trethowan:

The Mazars report is specifically tailored to the Irish market. It has a statistically valid population and asks a range of questions that complement each other to provide a report on the Irish market. While it could be argued that the European numbers are valid because they are taken from across the EU, they are fitting into a situation in which Ireland has had the biggest dip in GDP, except, probably, for Greece. The Mazars survey is consistent and provides me with a picture of Irish business.

I think I have covered most of the points raised. If I have missed anything I hope the Deputy will draw it to my attention.

Dara Calleary (Mayo, Fianna Fail)
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Has Mr. Trethowan any way of measuring what are called the discouraged borrowers - that is, people who do not actually apply for a loan?

Mr. John Trethowan:

That could be an issue. The banks reporting their monthly statistics on percentage sanction to the review office include only written formal applications. We have had a couple of reports in the last week about each of the two banks. A couple of people have come to the review office to say they went in and asked and were told not to bother. We have referred those reports to the banks. The staff in the two branches concerned are to be retrained to avoid that. I understand that in at least one of the banks, even informal requests are now being logged and sent to head office.

One cannot know what is said verbally by each of several thousand bank staff across the country on a daily basis. I remind small businesses that they have a right to apply for a loan. I urge them to do so but to make sure before they go in that they are well prepared and can argue their case. A request must be made formally and in writing. If it does not go into the bank system it will not be measured. If a loan is rejected and the applicant feels strongly about that, there is a bank appeal system and the Credit Review Office is there to help as well.

Mr. Pat Farrell:

I will try to cover all the questions asked. If I miss something I hope members will come back to me.

I am seeking, in a respectful way, to present facts. These are facts that are corroborated by third parties. They are not hypothetical but are based on real experience and data collected on what is happening in the SME sector.

The Credit Review Office consistently reports that somewhere between 80% and 85% of credit applications are approved. Thus, if 80,000 loans are approved, there must have been approximately 100,000 applications.

Reference was made to the turnaround time. I recently saw the figure of 60% cited as the percentage of loan applications approved within 15 working days. That figure should be 100%, although I know banks are working to bring down the approval time so there is a much faster turnaround time. I suspect some of this delay is caused by the issue Mr. Trethowan referred to: a business making an application does not always arrive with the correct information.

The issue of discouraged loans is a perennial one. If we want to get a handle on the level of refusals, businesses must make formal applications. Meeting a bank manager in the golf club, outside the church or in the corner shop and having a "how are you fixed?" type of conversation does not constitute an application. A bank cannot make an evaluation based on that kind of casual encounter. Members know that if a constituent comes to them with a case they need to gather all the salient facts before they can make a judgment. A formal application must be made, tedious as it may be. Businesses are run by entrepreneurs, who are extraordinarily resilient individuals. They would not survive in business otherwise. They have to be equally resilient in making sure they put in a formal application. If that formal application is put together in a robust way with all the salient facts, demonstrates the sustainability of the business and provides all the required information, it stands an excellent chance of success.

If it does not get credit, the Credit Review Office will make an independent evaluation and issue a judgment. In some cases the complaint is upheld and in other cases it is not upheld. I wish to reiterate that people should make a formal application for credit; if one does not ask, one will not know.

The matter of branch infrastructure is a case of cause and effect. We have to stand back for a moment and consider what is happening in the Irish banking sector. As a result of correct decisions which have been made externally, the balance sheets of the Irish banks have been significantly reduced. This is an absolute requirement of the restructuring of the Irish banking system. The banks are also required to significantly reduce their costs. For instance, the chief executive of one of the banks attended another committee meeting last week at which he cited a figure of 27,000 staff in the bank at the height of the economic boom and the figure is now 12,000, more than a halving of the number of staff. That level of restructuring by means of a reduction of overheads and infrastructure is bound to have an impact. That does not mean that the systems go to pieces at the other end but it poses significant challenges in a transition period. This is the situation which banks have to manage at the moment. At the committee meeting last week, both chief executives made the point that they are restructuring their operations in order to put more of a focus on decision-making at the front line. However, there are reasons for their decision to centralise some credit decisions such as quality and review considerations. It is not easy to get this right.

I endorse what was said about Senator Quinn. We invited Senator Quinn to speak at last year's banking conference. We all have lots to learn from people like Senator Quinn on how to interact with the customer and satisfy customers' needs. Banks are on this journey. We know that in the period of the boom, banks were very focused on asset-backed lending and very exposed to construction and property lending. The needs of the real economy today are centred in the small and medium enterprises sector and in the export sector. These are the needs that banks must serve. New skills need to be acquired rapidly so that banks can best serve the needs of the emerging parts of the economy. Our colleagues in the Institute of Bankers in Ireland have introduced education and training initiatives to which Mr. Trethowan referred in his report. These are directed specifically at improving the skills and capabilities of banking staff to lend to small and medium enterprises and to the new and emerging sectors of the economy.

The banks are not ignoring the United Kingdom market. Ireland is in the eurozone. The vast majority of SME exports are to continental Europe, much more so than to the UK. I do not have information about the UK market but I will endeavour to get it and to supply it to the Deputy. I am sure most people read the UK newspapers from time to time which describe the very same challenges and issues that obtain in the UK market with regard to access to credit and the distress for small and medium enterprises. I do not think there is a fundamental difference in the two markets.

Peadar Tóibín (Meath West, Sinn Fein)
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I refer to the European Commission statement which is quite startling that Ireland has the second worst credit environment in Europe after Greece. Credit was being lashed into the economy prior to 2008 and the mirror image is happening now. This is the result of European and Government policy. There is a pressure on banks to deleverage from markets. Banks need to reduce their costs and exposure.

ISME represents small business and its figures are startling. A total of 45% of SMEs looking for loans have been refused credit; 25% of SMEs did not make a loan application because they were discouraged from doing so by the bank; 72% of firms stated that bailed out banks are making it more difficult to access finance. Those statistics are for the period up to last September 2012; they are live figures. What is the current level of credit in the market? A total of €2.6 billion credit is outstanding to SMEs. How does that compare to the situation ten years ago?

There is confusion about the Government's objectives with regard to facilitation of new credit. Would it be better for banks to separate refinancing credit from new credit and to have separate targets for the banks? Politicians are under pressure from small business to ensure credit is available for them. We are told the banks are facilitating this lending but much of the finance is directed to refinancing rather than being issued as new credit.

The cost of borrowing is a barrier to accessing finance. It is more expensive to access finance in Ireland than in other European countries. The micro-enterprise facility charges more for finance than the banks. I ask Mr. Farrell for his view on this point. Small indigenous businesses with non-performing legacy loans were advised to put money into property and not to put all their eggs in one basket. Spicers in Navan and Olhausen in Dublin, are examples of businesses that were functioning. Is it possible for the banking industry to separate those loans from the functioning business in order to safeguard jobs? Can these loans be written down? How do banks accommodate small viable businesses ? How are customers of the former Anglo Irish Bank or Bank of Scotland (Ireland) faring when applying for credit rating with banks? How can they ensure access to credit from the banks?

Mr. Pat Farrell:

I believe the situation is improving. I recently attended the gathering of the Small Firms Association which has ten times more members than ISME, if I am not mistaken. It is a very representative association. The president of the association, Ian Martin, cited four barriers to business. Availability of credit was the fourth barrier. The top item was the inability to get payment from other creditors over a reasonable period of time. Other issues included the cost of doing business and the issue of regulation which is a somewhat hardy annual for all businesses.

On the question of the customers of Bank of Scotland (Ireland) and other banks, part of the new lending by banks has been to refinance former customers of those banks who exited from the market.

That is a conscious act on the part of another bank - to take a brand new business and extend loans to it to replace the loans that were hitherto in place from the other bank. It is not a casual job but involves seriously valuing the businesses. If these companies were not refinanced they would find themselves going out of business.

On the question of the level of credit ten years ago and now, I do not have that figure. We will see if we can get that.

Peadar Tóibín (Meath West, Sinn Fein)
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I was asking about a comparative analysis. Obviously, €26.6 billion is a substantial amount, but is it the comparative analysis-----

Mr. Pat Farrell:

We will try to get that figure for the Deputy. I must make the point that most people who were in business around 2007, when preparing their three- or five-year plans, projected that the economy would have grown by about 25% up to now, but instead it has shrunk by 25%. That is a catastrophic reduction in the economic output of the domestic economy. Something has to give. If one builds one's business on servicing that level of capacity, one must seriously reduce one's business or it may transpire that one no longer has a viable business. That is a hard but indisputable fact, and it needs to be borne in mind.

On the issue of non-performing loans, the Deputy is correct. In many cases, one of the big problems - two chief executives of the banks who appeared before another committee recently referred to this, and Mr. Trethowan is also aware of it - is that the underlying business is still profitable and sound but people got involved in property speculation and investment during the Celtic tiger era and they are now trying to service those investments from the business, which is putting a huge strain on the business. One of the challenges for banks is to work with customers to examine the core business and the activity within it to ascertain the needs in this regard while, separately, examining the property issue and how it can be dealt with or structured. Mr. Trethowan may have more to say on that. I am not sure whether I covered all of the Deputy's questions.

Mr. Felix O'Regan:

I will add one point which may be helpful. The Deputy referred to ISME. We have had surveys from the Small Firms Association in the past, Chambers Ireland has done some work, and we have done our own work. In their wisdom, the two key Departments - the Department of Jobs, Enterprise and Innovation and the Department of Finance - brought all of the stakeholders, including the bodies represented, around the table about 18 months ago and said that we had to get to the bottom of this to obtain a real picture of what was happening in lending and that the Government would commission a piece of work in this regard, and that is how we got the Mazars study. All of the stakeholders agreed that this would be the definitive piece of research that informed policy and practice as we moved forward. ISME was at that table, as were the SFA and ourselves. That is the reason we consistently point to the Mazars study, warts and all - in which the warts, from our point of view, are deficiencies. We must all subscribe to one definitive piece of work. The figures produced by Mazars are nowhere near the sort of figures ISME continues to produce. I believe I am correct in saying that Mr. Trethowan and his colleagues in the Credit Review Office have also had issues with the ISME research. We are all trying to subscribe to and support the same definitive piece of work.

To return to a point Deputy Calleary raised regarding discouraged borrowers, one result from the research that was particularly worrying was that 45% of businesses said their opinions about whether banks were lending were formed on the basis of media reports or statements from what they heard outside, rather than their own experience. Obviously there are businesses that base their opinions on their experiences, but nearly half of the respondents said their views were driven by media reports. The challenge for us is to cut through that and try to get a more positive message across that what is involved is, as Mr. O'Farrell said, the formulation of a formal credit application and then going through the process.

Mr. John Trethowan:

I will deal with the questions from the top of the list, and the first question I have listed is the one on the size of the loan book. I have been monitoring the loan books for the past two and half years, since April 2010, and I can comment on the general direction of lending. It has been downwards. Each half-year we ask the banks to do what is called a funds flow statement, which shows the starting balance of their loan books and the end balance at the end of the period, and it shows how much lending has been done, how many repayments have been received, what interest has been charged and what has been written off. It tracks all the movements in the book. Irish businesses are currently paying down debt much more quickly than the demand for lending is putting new money into the market. There is a clear reason for the decline in the loan books during the past two and half years. I cannot speak for the past ten years but I am sure someone will find those numbers for the Deputy.

On the ISME survey, all of the trade bodies and trade groups - ISME, Chambers Ireland, the SFA, the IFA and the hoteliers - have a vital role to play in the market. They keep the pressure on from the demand side and keep everyone honest. I have a different view on the ISME survey. My problem with it is that ISME surveys all of its members. It sent out 8,000-odd surveys and reported on the number it received back, which was about 800. The people who tend to reply to such surveys are people who have issues - people who have been on the wrong side of staff satisfaction surveys and so on - so the survey is skewed towards the negative. That is my issue with the survey. It does not reflect the number of people who were asked to respond; it only reflects those who responded, which skews it towards the negative side.

On the separation of new and restructured loans, that is one of the fundamental things we do in the Credit Review Office. We do it in some of the 55% of cases in which we can help to get credit for businesses. We do it for farms and also for small businesses. Farmers were encouraged in poorer times to engage in secondary enterprises and many of them went into building as a secondary enterprise, including farm buildings, for which there were grants available. In such cases, we often find that the farm is viable but the farmer has not collected the trade debt on the building. By separating the farm from the secondary enterprise, we are able to show that the business is viable as a farm and that we need to park the other debt and see, first, if the farm business can survive through this period and, second, if it can make some contribution towards paying off the debt. It is the same for small businesses.

There was a question about legacy loans. I would say that applies in half of the cases we see. We always ask for a statement of assets from the main promoter of the business, whether it be the sole owner or the principal director. Invariably, when we ask for a statement of assets, we are given a list of buy-to-let properties. We have a table which shows the value they were bought at, their current value, how much was borrowed against the properties, how much is due to be repaid and what rentals there are. Those were the reserves of the business during the Celtic tiger years, and instead of being released as a liquid source of cash, they are now fixed assets. They either break even or go underwater, and instead of providing cash for the business the servicing costs of the loans are pulling the business back. Therefore, they need to be parked and the core business needs to be examined.

Anglo Irish Bank is precluded from making new loans and Bank of Scotland (Ireland) has declared it is leaving Ireland. We get some applications in which the business is currently insolvent because of large property debts with, let us say, Bank of Scotland (Ireland). Certus is doing forgiveness of debts and the application we get would be to finance a deal to refinance the Bank of Scotland (Ireland) debt. It might be a tenth of what was borrowed. For a business with a balance sheet that shows it is insolvent with a level of debt on one side, if the debt is written down to a tenth of the amount, it is transformational for the business. It gives it a future. We are encouraging the active banks - the pillar banks and Ulster Bank - to refinance such loans.

In most cases we manage to get that done, but there is a reluctance on the part of all the banks to take on someone else's debt. That is an issue also.

On the cost of lending and the micro-enterprise fund, the cost of lending reflects the price banks are having to pay for the funds. Until the collapse of Lehman Brothers banks were merrily funding themselves on the money markets at reasonably cheap prices but that disappeared and has remained broken since 2008. If members read the newspapers they will see the advertisements for deposits, and they are well over 3%. That is what banks are paying currently for retail money. They must take that, absorb their own costs and then lend it out again.

The cost of funds is what it is because that is the market. In the applications and the appeals we see we always ask how much the bank is proposing to charge. Given the level of risk we see in some of the applications it is not unreasonable. The micro-enterprise fund is charging the premium because the level of risk it is taking is much higher than in traditional bank lending. I have to be fair to both the supply side and the demand side in my job and I must face reality. That is the position on the cost of funds. The market is dictating that rate. AIB is showing the cost of funds as a funding premium. That is an abnormal situation and hopefully in time, if markets return to normal, it will take that premium back up again.

Peadar Tóibín (Meath West, Sinn Fein)
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Mr. Trethowan mentioned that parking should happen with regard to legacy debts. Is that regularly happening with regard to businesses with other debts? The reduction of the loan book may not be definitive but nonetheless it would that indicate that it is a fair indication of ISME's experience because the trend is going in that direction.

Mr. Trethowan mentioned in his report that a tipping point is happening of businesses surviving on directors' loans, and that is drying up. What significant effect will that have on business and their experience?

Mr. John Trethowan:

On the parking of the debts, it is not happening in a widespread way but when it was last here the troika asked for the temporary forbearance to move into more long-term restructuring. Currently, people have been turning over the forbearance waiting for better times to come but the troika has said it wants to see a business in that position, which is struggling, restructured over five to seven years with a proper programme. That will mean that those legacy debts will have to be addressed one way or another.

It is not the job of the Credit Review Office to talk about debt forgiveness. We try to make a deal without recommending that the bank write down debt but the reality is that some level of forgiveness by all of the banks will have to be required on the way forward to deal with just the legacy debts.

On the reduction, the global economy is awash with cash with businesses paying down debt, and not just in Ireland. It is not an Irish phenomenon; it is a situation across the world. There is approximately €15 trillion in cash on businesses' balance sheets across the world. Businesses are not borrowing; they are repaying.

On directors' loans, again, one of the features we see in many appeals is that when we get to the capital account there is a big chunk in it with the directors' loans. It may be that there is some capacity remaining out there but we are probably in year 5 of these challenging times for domestic demand, turnover and profitability. The capability of directors to continue to fund businesses from their own resources may be getting strained.

The other aspect that would worry me is the trade debts in some business balance sheets. As bank lending has been tight for some businesses they have borrowed from their suppliers and suppliers have been willing to lend because they want to increase their turnover, but once a trade debt is taken onto someone's books they become the banker for that other business. If they go down, they have a bad debt on their books. It is not unknown for us to see a good business brought down just by bad trade debts and therefore it is something about which to be cautious.

Damien English (Meath West, Fine Gael)
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Does Mr. Farrell want to address those questions or wait until the next ones-----

Mr. Pat Farrell:

To come back to the point on the slight reduction in the size of the debt outstanding, I refer to the point Mr. Trethowan made earlier. Businesses are paying down debt faster than they are borrowing. The fact that the overall book moves downwards slightly does not necessarily mean that less money is being lent but that people are paying down debt faster than they are borrowing.

Feargal Quinn (Independent)
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The witnesses are welcome. Mr. Trethowan said that to date the Credit Review Office has received 281 applications for formal appeals on which 175 opinions have been issued and the process completed, and of those 55% have been upheld. What happened between the time somebody was refused credit, his or her going to the Credit Review Office, it going back to the bank, and the bank changing its mind?

I have had two experiences in recent years. I have been judging the Business & Finance Entrepreneur of the Year for the past three years, the most recent of which we finished yesterday. I was also involved in a television programme called "Retail Therapy" which involved meeting small businesses. I found that those businesses that were bright and with it, and I am thinking of the Entrepreneur of the Year, had no problem getting loans because they were professional in the manner in which they went about doing that. I have met other companies which had two views on that. One was that having read what is in the newspapers they knew they had no chance of getting a loan and therefore they did not look for one. The other was that they had put in an application that was poorly worded, badly advised and lacking in professionalism. I would not give them a loan on that basis. However, I found that if I gave them some advice or got somebody to give them advice the entire situation changes. Is that what has happened? I believe the bank has a strong case to make when it says people are coming in to them ill-prepared or that people are not coming in to them because they have read in the newspapers that they have no chance of getting money. Is that the experience of the Credit Review Office as well? It appears that if there has been a 55% change of attitude something has changed from the time the bank said "No" to the time it said "Yes.

Mr. John Trethowan:

We do not have bank policies on solvency, gearing and security. The one question we ask on any application is whether the bank will lose money. If the answer to that is that they do not think so we will support it. That is the only policy we have, and that is where many of the loan applications are failing because they cannot tick all the boxes.

As I explained to the Deputy earlier, we disaggregate the problem from the core business and see if the core business is viable. We are also keen to know the number of jobs that are at risk each time and if there are jobs at risk we will do everything we can to try to save that business.

We have a small team of about eight, including Ms Catherine Collins and myself. Five of us are very experienced bankers. Ms Collins is an experienced public sector analyst. My bankers are not order takers the way that has developed in our branch, business centres and banks where people take down details and send them to someone in Dublin for a credit decision. We talk to the customer. From time to time when we put in an application the bank will come back to us and say it did not know that because the person never told it. We have experienced lenders who will talk to them and when information starts to come out it makes the deal doable.

When we submit an opinion, it follows a standard and very recognisable format. We examine the strategic background of the business in question, its location, what it does and the experience of the promoters, both in business and in what they do. We consider the amount of existing lending and the statement of assets. We determine whether there are buy-to-let properties and the serviceability. We also determine the viability of the proposal from the borrower's perspective. We ask whether it will credibly generate the cash to repay the loan. The banks know what is coming each time and it depends on how it will look. It is through examining all these factors that we can change a decision by a bank.

I am sure the banks do not like our decisions in some cases. As with all loans, some will be bad; a feature of lending money is that one does not get it all back. I am sure that when loans go wrong, banks will point the finger and say John Trethowan told us to lend it.

I have been critical about the banks in my last couple of reports in respect of enterprise risk-taking. I am sure that, at times, the banks wished my office did not exist. However, that is part of the job. Banks should never be too comfortable with the Credit Review Office. They have always co-operated with us. They have had real problems with two of our opinions. We listened to their views and had to accept them. In one case, the deal in question was still viable but it turned out there were many planning-permission problems associated with the property for which finance was sought. Therefore, the bank's reason for not advancing the money was understandable. We accepted its view.

Damien English (Meath West, Fine Gael)
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If the Credit Review Office had the capacity to meet all clients before they went to their banks, would circumstances be improved greatly? There seems to be an absence of professional advice on putting together cash flow statements and filling out applications. That is a fairly common theme.

When Mr. Trethowan was first here two and a half years ago, we suggested his office or one with similar capacity should be involved at an earlier stage.

Mr. John Trethowan:

There are only eight of us.

Damien English (Meath West, Fine Gael)
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I accept there is no capacity.

Mr. John Trethowan:

Our capacity would be exhausted very quickly. We will have to consider expanding our team because the demand is rising. However, local accountants could be more proactive in giving advice to businesses. The financial accounts we see are being produced on spreadsheets. It would not require much extra effort to generate some key ratios and have a cup of coffee with the borrower to outline the debt level associated with the business. There is also a role for the county enterprise boards and the LEOs, as they will come to be known, in respect of business mentoring and advice. The Credit Review Office does not necessarily have to be involved as there are other bodies with capacity.

Damien English (Meath West, Fine Gael)
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Ideally, it would be a body such as the Credit Review Office.

Mr. John Trethowan:

Exactly. The county enterprise boards and local accountants could have a role. I will be meeting CAI representatives next week and will ask them to take on board the new common business plan format and embed it into their continuous professional development courses.

Mr. Pat Farrell:

The business-plan template is in the members' pack. Significant work was done on it with all the relevant accountancy bodies. A sustainable business that submits a credit application using the template stands an excellent chance of obtaining credit because it captures all the relevant dimensions and covers all the information needed. To date, there has been no standard template. An application of 20 pages might have been no better than an application with one page because it might not have contained answers to the right questions. The document we have produced outlines the questions one needs to answer and the information that needs to be supplied. Members may find it useful because they encounter people in their constituency work who are contemplating making an application or who may be in the middle of making one. They will also know people in the accountancy profession. The profession has agreed to use the template more often than not as the standard template for submitting applications.

Anthony Lawlor (Kildare North, Fine Gael)
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Is the initiative just from Mr. Farrell’s office or does it have the support of the entire banking sector?

Mr. Pat Farrell:

The document is submitted by the applicant. The objective is to have applicants use this template when applying for credit. We have developed it with the accountants. It is downloadable.

Mr. Felix O'Regan:

It is on all the accountants’ websites, our website and the banks’ websites. The important point is that if the business applicant produces information in line with the template, it will be acceptable and recognised by all lenders we represent.

Anthony Lawlor (Kildare North, Fine Gael)
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That is positive.

Seán Kyne (Galway West, Fine Gael)
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I welcome the delegates.

The number of applications was 281. Did Mr. Trethowan expect more when his office started off? At what point after an applicant is refused credit can he or she approach the Credit Review Office? Do banks advise those who are refused credit of the existence of the Credit Review Office?

Is the Credit Review Office concerned that banks will be quicker to refuse businesses seeking loans smaller than €25,000 in the knowledge that there is in place a micro-finance fund, which constitutes an opt-out or alternative?

Mr. Trethowan stated the troika has asked the banks to move beyond short-term forbearance to a more structured plan. Is there evidence of a shift in policy in this regard?

Consider the table summarising the statistics on banks' formal internal appeals. Will Mr. Trethowan explain it? I understand 6% of Bank of Ireland appeals were overturned and that 31% of AIB appeals were overturned. What does this say about the two banks? Why was there such a difference?

Many members have said the views they hear on the ground are different from those we hear from the Irish Banking Federation. At the start of this year I met two local bank managers from one of the pillar banks. They told me they are open for business and encouraged me to send clients to them. I stated I had heard anecdotally that the bank was reluctant to lend and the managers accepted there was reluctance in 2011 and that the bank was anxious about or scared of being too generous in giving out loans. Since then, one would have expected to have seen an increase in lending. Is the bankers’ statement that they are more open for business backed up in the figures?

Mr. Trethowan referred to the parking of other debt. We have been told many businesses that are doing well invested in property, both foreign and Irish, during what were supposedly the good times. Obviously, the property prices have collapsed. Is business debt separated from property debt? Is there separation as might be evident in respect of building-related debts incurred by farmers who worked in the building industry? Has this been recognised?

Mr. John Trethowan:

Before we started, we did not know whether there would be a flood or trickle of applications. The stream probably has been increasing. At present, we are receiving more applications than we did at the beginning. To some extent, the numbers are not very relevant in that if any of the 80,000 applications referred to is declined, the bank is obliged in the first instance to advise the applicant of its internal appeals process and of the process of the Credit Review Office. When the banks decline an application, they do not know who will approach the Credit Review Office. This has upped the game of the banks in the past two years in that they must meet a standard against which they know they could be measured if my office were to receive an appeal.

One reason people may not approach us is that they may be so weary on being refused by their banks that they do not want to go through another process.

We have refined our Credit Review Office process from April 2010. Ms Catherine Collins has worked hard to make it as simple as possible and we have further work to do to try to cut down any administrative overhead. In fact, we now are getting to the stage at which people will simply approach us stating they wish to appeal and we will do most of the work for them thereafter. We must engage them and work with them to find out about their business, but we try to make that as painless as possible.

As for the troika's suggestion regarding restructuring, it only came out with it at its last visit approximately three or four weeks ago and it will take a while for that to work through. Members should bear in mind what I said about trade debts. There will be some businesses which do not make it through this process and all the people they have as creditors will be obliged to take losses on their trade books. A message I impart to businesses every time I speak to them is to watch their own trade books because that will be their Achilles heel. On the question of internal bank appeals, members really must ask the banks. We report this each quarter, and I can see that AIB is overturning a lot more of its own decisions while Bank of Ireland is overturning very few. It may be the view of Bank of Ireland that it its happy with its credit process from the outset but again, that is a question for the banks. I cannot comment on that. On our actual appeals and those which were overturned, there is not much difference between the two banks, and consequently I cannot draw any conclusions from the internal appeals.

On the demand for loans, one must also consider the economy and its present state in comparison with the position in 2007. We have an economy that shrank by 25%. Businesses have downscaled accordingly and the size of the business, the number of employees, the working capital requirements and stock holdings all have come down to reflect this. If a business has not copped on to the situation, it has basically gone out of business. There is also a lack of demand for new investment. People are not building new showrooms or new shops because, at present, they cannot see a return on the investment or how to service the debt. Consequently, there are pretty identifiable reasons demand for credit is lower now than would have been the case in 2007. For me, the challenge will come as the economy picks up and people start to become more optimistic and want to trade at higher levels, which will require more working capital and may require the investment of money. At that stage, when such people approach the banks, we will be looking to the banks to make sure they do not stifle any recovery that is happening. Certainly, the Credit Review Office will be needed most whenever the demand for credit actually rises.

Mr. Pat Farrell:

Mr. Trethowan has probably answered the question in respect of applications. I will revert to one point the Deputy made about microfinance. The increased rate of refusals suggested by the Deputy will not happen for the following reason, if no other. Banks are supplying most of the finance for the Microfinance Ireland fund. While there is a certain amount of risk-sharing with regard to the equity that is being invested in respect of the guarantee for the loans, effectively the lion's share of the financing will come through the banking sector. Effectively, the banks will be the primary source of finance for the Microfinance Ireland fund, as they have been for the Social Finance Foundation over the past number of years. However, I believe what Microfinance Ireland is doing constitutes an extremely important initiative on the Government's part because many of these businesses comprise one, two or three people and are fairly low in respect of formal business management or planning skills. That is not anyone's fault; it is simply a function of the type of business they operate. Therefore, their proposition to a bank to obtain money is more challenging than would be the case with regard to meeting the traditional criteria. Moreover, this was where the highest rate of decline was detected, because these are riskier enterprises. Effectively, a model has been developed to try to change that dynamic and hopefully - there is no reason to believe otherwise - the establishment of that structure, for which banks will supply quite a lot of finance, will help to address that issue. It is a particular challenge that has been identified in both the Mazars report and Mr. Trethowan's reports.

Mr. John Trethowan:

The genesis of the enterprise loan scheme was the First Step scheme that went before it, which has transformed itself into the enterprise loan scheme. We have been using that for two and a half years for smaller loans that have come through. Many of these loans involve people who are starting up for the first time with new enterprises with little or no capital. These people basically are going it alone. They may be coming out of unemployment and are having a go themselves. However, banks never supplied seed capital for start-ups, especially for small-scale lending, and consequently this scheme is tailored for them. We put a lot of people through to the First Step programme prior to this and we already have started using the microenterprise fund for some of the smaller ones, in conjunction with the county enterprise boards, to make sure that such small businesses are mentored from the outset as well.

Seán Kyne (Galway West, Fine Gael)
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I wish to ask Mr. Farrell the same question I asked of Mr. Trethowan regarding the summary of appeals to the banks and the percentages of 6% and 31% for Bank of Ireland and AIB, respectively-----

Mr. Pat Farrell:

Mr. Trethowan probably answered it more authoritatively, in the sense that he did not detect any substantive difference between the two institutions. I believe that is what I heard him say.

Mr. John Trethowan:

On appeals.

Mr. Pat Farrell:

On appeals, in respect of the available data. I cannot add to that and have no additional information to what Mr. Trethowan has said.

Damien English (Meath West, Fine Gael)
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Three members have yet to ask questions. I will take all three together because the joint committee is due to hear a second presentation. The order will be Deputy Áine Collins, Deputy Lawlor and Senator White.

Áine Collins (Cork North West, Fine Gael)
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I welcome the witnesses. As I have approximately eight questions, I will go through them as quickly as possible. First, I wish to make a suggestion in respect of the report from the Irish Banking Federation. On page 4, in respect of the percentage of small and medium enterprises, SMEs, using banking credit, it might be a good idea to consider debtor days when considering bank overdraft facilities across the rest of Europe as opposed to here, because I suspect we are very poor in managing our debtors. As Mr. Trethowan has already indicated, I believe that would be a worthwhile exercise. How do the witnesses envisage the loan guarantee scheme helping? As it has been established that demand is weak, the witnesses should indicate their views on what the banks are doing to stimulate demand. Is the pricing of interest rates a disincentive? What are the banks doing differently today in comparison with what they were doing 18 months ago when the Mazars report was drawn up? How are banks approaching the task of gaining a real understanding of their customers' requirements and how they can be supported where security clearly is an issue, where credit rating is an issue or where there are core and non-core issues extant? To paraphrase Fiona Muldoon of the Central Bank, there is a lot of activity but no real outcomes. Banks may be putting loans on different interest rates or on shorter terms but they are not really dealing with the core issues. I do not believe that waiting for property prices to increase will solve the problem any time soon. This is a real issue.

In my experience of helping clients to get loans, there is a huge mix, with people putting together very good business plans and getting loans, as well as people who are putting together very poor ones. It is clear there is a major issue in respect of soft supports nationwide. Everyone present is familiar with my views on this issue and on the concept of establishing a stronger mentoring force whereby businesses can receive help. I have spoken to the banks about it and they agree. However, it is important to have such a force because at present there is much activity in that space but there really is no place for some of it. While the banks were talking about entering that space, I do not think it is a space into which they should go. There should be a single establishment that does this and does so really well. I seek the witnesses' views in this regard.

Damien English (Meath West, Fine Gael)
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While I did not count eight questions, I am sure there were eight.

Anthony Lawlor (Kildare North, Fine Gael)
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History has a habit of coming back to haunt one. I will read a quote from four years ago: "The banking sector will not be found wanting in providing increased support for its business customers in these very challenging times." It has taken four years to come full circle from the position then to the fact that small businesses were not getting any support at all.

I have a couple of questions, although many of the questions have been dealt with previously. First, I refer to the age profile of the people who approach the Credit Review Office with regard to young entrepreneurs and young people who approach it seeking finance. I acknowledge it is extremely difficult and Mr. Trethowan has mentioned that most of the businesses with which he is dealing now have been set up in the past ten years. I note entrepreneurial courses may now be found within schools and third level institutions for young people starting out.

Are we going to see the banks increase lending to these young people starting out in business? A high percentage of businesses succeed but that should not be the case as there should be a fair percentage of failures too. In America, they often say one learns more from the first failure of a business which helps in future enterprises. What is the banks’ reaction to someone trying to get back into business after failing in a previous venture?

Another problem I have with the banks concerns their capacity to understand business. Many experienced bank employees who were used to dealing with small businesses have left. Can the banks still understand loan applications from small businesses, particularly now as lending operations seem to have become more centralised? Mr. David Duffy told the committee he wanted to get the branches to make the decisions on the loans themselves. Is it because many branches do not have the capacity to make these decisions that the system has become more centralised?

Mary White (Fianna Fail)
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I welcome the delegation and have known Mr. Pat Farrell for some years. He has done a very good PR job for the banks and was faultless in his presentation showing everything is perfect with them. I am delighted to meet Mr. John Trethowan in person. He was the fair-haired boy for a while when he agreed with the banks. When he disagreed with them, he became a bête noire. I heard one of the bank bosses claim various new companies were successful when Mr. Trethowan pointed out they had already gone out of business.

Bank lending overall has contracted due to the weak demand in the economy. However, yesterday, Lars Frisell, chief economist of the Central Bank, at a European conference, gave a more fundamental reason. He claimed Ireland's banks face great economic uncertainty and pressure to deleverage which stifles their ability or willingness to supply the economy with credit at reasonable costs. Mr. Trethowan has upheld 55% of the appeals made to his office. Have the banks subsequently agreed to provide the funding?

Mr. Trethowan referred to relationship banking and the centralisation of decision-making on credit applications, the reduction in rural branches and the continuing change of front-of-house staff leading to many small and medium-sized enterprises, SMEs, feeling isolated and remote from their banks. Any of us involved in a SME know that it is all about the character, calibre and capability of the promoter whether the business survives or not. I do not agree with Senator Quinn that the banks are being upfront about their loans. I do not believe anyone seriously in business today would make a presentation to a bank that would not stand up to scrutiny, particularly with the wide availability of computer programmes and so forth for such exercises.

Regarding the €3.5 billion lending targets for the two pillar banks, Mr. Trethowan stated new lending is a vital component of economic growth and is an area in which the Credit Review Office is encouraging banks to be more accommodating. What are the components of this €3.5 billion lending? Why are the banks not more transparent about it? There is a case for including restructured loans in the targets. The same cannot be said for annual overdraft limits which are part of the annual process of cash flow management. Are annual renewals of overdraft limits and invoice discounting included in this €3.5 billion target?

As an opposition spokesperson in the Seanad on jobs, enterprise and innovation, I have harangued the Minister, Deputy Bruton, about the lack of money available for SMEs. I believe he is listening to the banks rather than to the SMEs. While a bank may approve a loan, it may effectively stifle it being drawn down by imposing tough conditions such as personal guarantees. What is the Credit Review Office's experience of this matter?

I am delighted Mr. Trethowan, who is from the North, is head of this office. If we had a united Ireland, the people in the North could be running the show down here as they are so efficient. Mr. Pat Farrell is a master of the seamless presentation of the bank's position.

Damien English (Meath West, Fine Gael)
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Is the position on the security on loans going to get worse when we enact the insolvency legislation? Three years ago, there was much talk about retraining bank staff to deal with SME business plans, cash flows and so forth. Where are the plans with this? When a SME is refused credit by a bank, it is not always clear why and is often just a one-line rejection. If more was done on explaining why, it could assist in the re-application process. I accept some of them need to put more effort into applications but more information could help them.

Mr. Pat Farrell:

Up to 2,000 credit applications are approved every day. Do the banks get every one of these right? No. There are some people who are approved who should not have been and their loans will become bad ones. The banks are probably refusing people who may not have made a good case in the first place but if they go through the Credit Review Office they may get credit after all. Is the system 100% perfect? Of course it is not. We are working mightily hard to make sure we get all the applications right but it must be remembered we are all human and it is a fallible decision-making process.

I take the point about debtor days. Mr. Trethowan already alluded to it that the amount of credit by stealth that is taken from business to business is high. We have a culture of it and it has not gotten much better since the downturn.

The banks have been trying to play their part in preparing business plans for accountants of SMEs. If every SME accountant used our template, it would help drive up the quality of applications and get the decision right the first time rather than having to be submitted again or through the Credit Review Office. I would like to be out of business too.

This is a journey. I am not trying to pretend that everything is rosy in the garden.

I accept the comment from Senator White, which one would have to wear lightly, as would anybody who works in the banking sector. There is still a considerable amount of work to do.

In terms of business failures, one of the important aspects is the reform of the bankruptcy laws which we have supported. One of the problems for business, to which Deputy Lawlor referred, is that in this country there is a culture that it is not okay to fail and there is a stigma attaching to failing in business. Perhaps one of the reasons for this is the bankruptcy laws, which effectively mean that one is cast out for 12 years from one's business activity. That will be changed quite quickly to a much shorter discharge period. One will see some restructuring of business activity going through that process.

Anthony Lawlor (Kildare North, Fine Gael)
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On that point, Mr. Farrell did not give me an answer on how the banks would feel about someone who comes back to them having already failed.

Mr. Pat Farrell:

It is something of a hypothetical case. There are many prominently involved in business in this country who have failed, who are still in business and who have started new enterprises, and that speaks for itself. It is not about the fact that somebody has been in business and has failed. One looks at each business proposition as it comes before one. Sometimes people are all the better for having failed because it is the experience they gain from failure that is perhaps more important than the experience they gain from success. Failure is not an issue. Some of the questions were specific to Mr. Trethowan.

Young entrepreneurs are a specific area that should be targeted. Some of the banks - I stand open to correction - may have funds or resources dedicated to nurturing young entrepreneurs. Businesses age and their owners age with them. One needs to be able to bring a new cohort of young entrepreneurs on track who will start up new enterprises, give new energy and refresh existing enterprises, and bring new ideas and new thoughts. There is a significant cohort of young people who have brilliant business ideas but, as Deputy Áine Collins stated, they need mentoring and support. The banks are actively putting resources into that area at present. It may be there is merit in looking at co-ordinating mentoring activities better. There is probably more than enough mentoring activity around. It is to direct it in the appropriate manner. Young entrepreneurs must be nurtured by banks because the customers of the banks will eventually age and retire, and they must replace them with new customers. It is self-evident that one must encourage young entrepreneurs.

Mr. John Trethowan:

On the loan guarantee scheme, we will probably be the first customers. We had two applications waiting and once the scheme went active, we had those back into the system. With the loan guarantee scheme, like the microenterprise fund and the Credit Review Office, there is no silver bullet that solves all our problems. What the Government and the previous Government together have done is put together a toolbox of various measures which are there to help small and medium-sized enterprises.

In answer to Senator White, I come down from the North with sterling in one pocket and euros in the other. That is the only difference I make between the two jurisdictions. In the North, they would love to have the supports we have for SMEs here. I have spoken to them. They look down here with envy at how we are supporting the SME sector.

Mary White (Fianna Fail)
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The culture.

Mr. John Trethowan:

And the culture as well. On the change since two and a half years ago when we started, certainly the banks were in disarray and they are now at least stabilised. Both banks have got their feet on the ground again whereas when I came here at the start, they were trying to find the bottom.

I was asked whether the banks understand customer requirements in waiting for the property upturn. They have been trying to push the forbearance on a rolling basis. The troika has signalled that it wants to stop that. Working to the end game for restructuring businesses, in a constructive manner one hopes, as that is the key to the matter, will require the businesses to work with the banks as well. This is not a one-way street. We have seen some instances where the information was being dealt out like poker from the business to the bank and the business would only give what the bank asked for.

On support for SMEs' capabilities, one of the measures the Action Plan for Jobs 2012 has been looking for is a one-stop shop. There are many good supports out there but one must hunt around for them. It would be helpful if there was one place to which one could go. I would hope that the local enterprise offices, LEOs, whenever they get started, will be empowered to be the one-stop shop for everyone.

Mr. Pat Farrell:

We support the loan guarantee scheme as well.

Damien English (Meath West, Fine Gael)
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Deputy Conaghan wants to make a quick comment.

Michael Conaghan (Dublin South Central, Labour)
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I apologise for missing the earlier part of the meeting. There were many data provided. What is the profile of young entrepreneurs seeking intervention from the Credit Review Office, from a gender perspective?

Ms Catherine Collins:

I get to answer that question. It is fairly reflective of any of the businesses that I worked with over the years. It is predominantly male but there are some females.

Michael Conaghan (Dublin South Central, Labour)
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If it is very unbalanced, are there particular interventions that are possible or being considered?

Ms Catherine Collins:

I am not sure what the Credit Review Office can do. For example, Enterprise Ireland has female entrepreneurship high up on the agenda and it has much work going in trying to promote start-ups from women.

The start-up situation is not somewhere that bank finance would always play. One needs capital and equity for businesses in a start-up situation and that is where the county enterprise boards, Enterprise Ireland and other such supporters, and the microfinance fund would play quite strongly.

Mr. John Trethowan:

There were a couple of other points. On the percentage of people who have failed and deserve a second chance, we see applications coming through from those who both have failed but who also have made a mistake because they were under so much pressure and probably have not been sleeping and so on. The bank would state the applicant made a particular mistake and it would not deal with him or her anymore. When we ask how long the applicant has banked with the bank and it replies that it is 20 years, we say there is one mistake involved and ask whether we can sort it out. We have managed to resolve a few cases like that.

On those who have failed, there is what in America they call the J-curve where one goes down a bit but one knows one has learnt from it and one can come back up. One hopes many of our businesses people will have learned many lessons over recent years and will be better for it on the way forward.

On the capacity to understand businesses, the banks could do more to understand their customers' businesses. I honestly believe that. The model of the order taken at the front end and someone doing the underwriting in Dublin is remote. I do not know whether the capacity is available now for businesses to get a temporary loan, perhaps for a week, to cover a payment in the way they always used to do.

On security for loans, the loan guarantee scheme will help. If that becomes a stumbling block, that is when the loan guarantee scheme can come back into play.

Mr. Felix O'Regan:

Deputy Áine Collins asked about MFI and linking in with the banking sector, in addition to the low-cost funding which we, together with the Exchequer, will finance. We are working to ensure there will be a system of referral from the banking system into MFI, the idea being that cases that do not meet standard conventional bank lending criteria from the microfinance area would be referred to MFI. It is important the banks do not send those applicants away but that they refer them to the local county enterprise boards and then to the MFI process.

Even if they do not get MFI funding at that stage, they are still free to appeal their original bank application to the Credit Review Office.

Damien English (Meath West, Fine Gael)
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We will now bring the session to a close.

Áine Collins (Cork North West, Fine Gael)
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I have one question on the credit rating.

Damien English (Meath West, Fine Gael)
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I must move on.

Áine Collins (Cork North West, Fine Gael)
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I did not get an answer as to whether credit ratings are affecting decisions.

Mary White (Fianna Fail)
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I asked whether the banks reversed their decisions on the appeals upheld by the office.

Damien English (Meath West, Fine Gael)
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The question has been answered.

Mary White (Fianna Fail)
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I was not here because I had to go to the Seanad Chamber. I also asked about transparency in accounting for the €3.5 billion. Why can we not know the breakdown of what is included?

Áine Collins (Cork North West, Fine Gael)
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How seriously are credit ratings affecting individuals who have not made payments in terms of accessing funds?

Mr. John Trethowan:

Of all the cases we asked the banks to uphold, they have come back to explain why they could not do so in respect of two. I explained that in one case the property for which finance was required gave rise to serious planning issues. It is not the case that the customer was having to fight once we gave our opinion. In regard to restructuring versus new money, I still take the view that restructuring is vital to protecting jobs. If banks start to withdraw credit from struggling businesses, we will be in a dire situation.

Damien English (Meath West, Fine Gael)
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The witnesses gave a more detailed answer earlier in the meeting.

Ms Catherine Collins:

Credit ratings form part of the decisions made by the banks and the Credit Review Office but they do not form the entire decision. At the end of the day the question is whether the bank will lose money. While the credit rating may be taken into account, if the business is viable and we see cashflow that would repay the loan, we are not going to get hung up on it.

Damien English (Meath West, Fine Gael)
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I thank the witnesses for appearing before the committee. I do not doubt we will engage with them again, although I hope the crisis will end soon.