Oireachtas Joint and Select Committees
Tuesday, 30 January 2018
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Cost of Doing Business in Ireland: Discussion (Resumed)
3:00 pm
Mary Butler (Waterford, Fianna Fail)
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I remind members, visitors and those in the Gallery to ensure that their mobile phones are switched off or in flight mode for the duration of the meeting as they interfere with the broadcasting equipment, even when in silent mode.
By virtue of section 17(2)(l) 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 in relation to a particular matter and they 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 they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that a member 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.
I welcome Mr. Felix O'Regan from the Banking and Payments Federation of Ireland, Mr. Michael Lauhoff, director of business banking, and Ms June Butler, head of SME banking, from Bank of Ireland; and Ms Catherine Moroney, head of business banking, and Ms Margaret Brennan, head of SME sector strategy, from Allied Irish Banks. I thank them for taking the time to attend. We are discussing the cost of doing business. I remind our guests that their presentations should be no more than five minutes in duration. Members have already received their copies of their presentations. I call Mr. O'Regan to make his opening statement.
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.
Mary Butler (Waterford, Fianna Fail)
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I invite Mr. Michael Lauhoff to make his opening statement.
Mr. Michael Lauhoff:
I thank the committee for the opportunity to present to it this afternoon.
Bank of Ireland has the largest banking branch network in Ireland. In addition to this, it has a team of mobile business relationship managers who look after the more complex financial needs of business customers, largely around their lending needs and who visit customers at their places of business. In addition to that, our branches are supported by two direct lending units, based in Kilkenny and in Dublin.
That facilitates customers in applying either over the phone or online at a time and a place that suits them, rather than having to make appointments to come into the branch.
Bank of Ireland is the largest lender to the Irish economy, but in addition to lending, which is obviously an important part of funding businesses, it is important to make sure a range of funding supports is available. Bank of Ireland is one of the largest investors in seed and early stage equity funds in Ireland.
In terms of changing how we approach our SME sector, we are responding to the changing needs of our customers. Over the past few years, we have invested significantly in our external lodgement ATM network throughout the country. That allows customers and businesses to lodge at a time and place that suits them, rather than having to come into the branch during their busy work day when they are meeting their own customers. For customers with larger lodgements and larger cash requirements, we continue to provide an over the counter cash service in the majority of our branches.
Customer behaviours are changing. At this point, less than 3% of transactions are actually conducted over the counter in branches. While much of that is consumer-led, from a business perspective, the percentage of transactions that are staff-assisted has reduced from 46% in 2014 to 28% now. That continues to reduce on an ongoing basis.
Contactless payments are a key development attributed to new technology. The use of contactless payments has increased exponentially. For Bank of Ireland last year, it increased by 89% year on year. That has facilitated the removal of much of the cash and coin requirements from the market, especially for low value purchases and retail operations.
In addition to the day to day branch services and physical lodgements, we are also investing in our online services. Customers are dealing with their day to day transaction requirements very differently. Our 365 online platform, which was originally developed for our consumer customers, has been made available to all business customers over the last few years. For the vast majority of business customers, the payment functionality on 365 online facilitates all of their payment requirements. For business customers with more complex payment transaction requirements, we have business online. We reduced the cost of that service in 2016 to a flat fee of €10 per month. We continue to invest in different ways in terms of facilitating customers in their day to day transaction requirements.
Bank of Ireland recognises that SMEs are the lifeblood of the economy and that the future of the economy is dependent on a successful SME sector. In order to make sure we are providing the appropriate support to those businesses, over the past number of years we have recruited a team of sector experts from across industries. These are people we have recruited from the sectors they work in and they are people who live and breathe their respective sectors. They understand the performance of the sector from the operator's point of view as opposed to from a financial perspective. That has given us a real insight in terms of what their business requirements are at the various stages of their development and how we can support them. In addition to one to one meetings with customers, the sectors team also organises a series of seminars and workshops throughout the country, bringing other key stakeholders from the industry together and supporting them in terms of new opportunities developing in their sectors, helping them to advance their own businesses.
In the fourth quarter of 2017, we hosted 26 Brexit-related events throughout the country which over 1,500 SMEs attended. This was focused on advising SMEs in terms of the supports that are available for businesses which have to make contingency plans for whatever scenario Brexit presents.
Another key part of our overall strategy, and where we see the branch network as being very important to us, is our overall activity in the community. Our enterprise programme and enterprise town activities have been very important in that respect. I know that a number of members have been to some of those events, which are very much focused on bringing local communities together, allowing local businesses to demonstrate what they have available for their own community, and increasing commercial activity in those locations. This will continue to be a core part of our strategy going forward.
We have also invested in a number of digital supports. As an example, we have entered into an exclusive partnership with WebPort Global, a business which is focused on developing contacts for businesses which are seeking to expand into new countries. Through its association with the World Trade Centre, it can provide Irish SMEs with the appropriate people to talk to in a new market. At this point in time, that partnership has delivered over 1,500 new business opportunities across 78 countries looking to expand their markets, especially with Brexit on the way.
In addition to two incubation units in Dublin and Galway, we partner with a number of other startup initiatives throughout the country where we provide a Bank of Ireland community manager who works with those other units in developing plans and campaigns of activity for startups and supports. We have dedicated spaces or work benches in a number of our branches. This space is free of charge and businesses can base themselves there and network. We run seminars, clinics and events to encourage innovation and new ideas among the start-up community in those locations.
Mr. O'Regan referred to access to finance. In addition to a number of initiatives that we run ourselves to increase our own customer base, we actively support Government-backed schemes to increase the flow of funding to the SME market. In terms of the Strategic Banking Corporation of Ireland, SBCI, we have fully allocated our lending in the original on-lending scheme and last year's agricashflow scheme and we are working constructively with SBCI to ensure that the roll-out of the Brexit working capital loan is deployed as effectively as possible. Microfinance Ireland, which Mr. O'Regan also mentioned, is an important supporter of microbusinesses in Ireland. We refer business to it weekly where they are not suitable for bank debt at this point in time.
The credit guarantee scheme has been an important initiative in supporting businesses which perhaps did not have sufficient collateral or security to get bank funding. We have actively supported this scheme and see it as an important support for the SME community. We have worked closely with the SBCI in developing the new phase of the scheme, which is now ready for launch.
Ms Catherine Moroney:
I thank the committee for the opportunity to discuss AIB's support for SMEs in Ireland. I am the head of business banking with AIB and I am joined by my colleague, Ms Margaret Brennan, head of SME sector strategy and specialists.
SMEs have played a vital role in Ireland’s ongoing economic recovery, with small and medium-sized businesses now employing more than 900,000 people across Ireland. As Mr. O'Regan stated, while there are still challenges ahead, Ireland is expected to remain one of Europe’s fastest growing economies this year. We are very aware that AIB’s primary role in the economy is to support and facilitate our customers in dealing with both the opportunities and challenges that lie ahead for them.
AIB has 2.3 million customers and we serve their needs through a combination of our people and our physical and digital infrastructures. We consider both equally vital to our customers. We have 275 AIB and EBS branches, 20 business centres throughout the country and a 24-hour phone and online banking service, as well as innovation centres and connectivity with the colleges - there are more than 19 of them - to bring the depth and breadth of that to our customers. We also provide daily banking facilities to our customers through 1,100 An Post locations nationally. This partnership infills our distribution capability.
I will briefly outline AIB’s lending activity to SMEs. We have approved a total of €5.5 billion in new lending in Ireland in 2016, of which €1.2 billion was to SMEs. In the first six months of 2017, that lending increased a further 13% on the same period in the prior year. These figures exclude all renewed loan facilities and renewed working capital facilities, so they are a benchmark of new term lending in support of Irish business growth. I cannot discuss the full year figures to December 2017 because we are in a closed period. Those are the figures up to as far as I can go, however.
Business lending, and business generally, is still largely relationship-driven in Ireland and we have recently appointed new heads of new business banking in each of our 19 local markets. These are supported by dedicated teams of business advisers and relationship managers. The idea is that we would stay close to our customers at their place of business. To support our business customers and assist them with a detailed understanding of those businesses, we have many years of sectoral expertise and have recruited sectoral experts from industry. They support the teams and our customers directly.
As a result of Brexit, last year we appointed 21 specialist SME Brexit advisers in the communities that we serve and we encourage our customers to be proactive about planning. That is a big challenge for us.
In this period when we are not sure what will happen, we are trying to encourage them to take action where they can, particularly to protect themselves against currency movements. We have a range of product types, time periods and price points to cater for their needs and risks, both fixed and variable. Our business credit line is one of the most flexible and competitively priced working capital facilities available in the Irish market.
There has been a lot of talk about access to credit. We have a 48-hour decision period commitment for all SME loans up to €60,000. This covers the vast majority of SMEs. They can be guaranteed if they come to us with all of their information we will have an answer for them in 48 hours. This is the commitment we give. They can also access this online or over the phone as we have a full service suite. We have also strongly supported Strategic Banking Corporation of Ireland initiatives, those that have happened and the one that will be announced. It is the privilege of the Strategic Banking Corporation of Ireland to announce it and it is working on the conditions.
It is important to mention our customers who are experiencing difficulty in their business. Our absolute priority is restructuring their facilities so they can sustain viable businesses. Our absolute commitment and number one priority where our customers engage with us is to support them back to viability and keep jobs in those businesses throughout the structure process.
In terms of the diversity of funding available in Ireland, which is receiving considerable attention, we invest in seed venture growth and capital investment funds, and we have €161 million across 13 funds. With those partners our play into those markets is a total of €1.1 billion. We have invested in 200 companies creating more than 3,000 jobs.
We published in-depth customer research at the start of 2017. Originally we did this for ourselves to understand the blockages in terms of customers accessing equity as opposed to just senior debt on which the Irish market relies quite heavily. We had some interesting findings, which I can discuss in the questions and answers. One was a fear of losing control in the business. In addition to providing equity we also provide tailored mezzanine finance. This can often be the difference between making a project viable. If the equity and senior debt is not sufficient, the mezzanine finance can often plug this gap.
We provide full in-branch cash and coin service throughout our entire network. We do not restrict transaction types to specific days or times. We offer highly competitive rates for cash handling, including the lowest price in the market for processing euro note cash. Our customers tell us in our research that convenience is key and we work to help them to move towards digital payment methods, but this is a choice they make. We do this through our online, self-service and paperless options, but they retain the choice and the cash option is still there for them. In 2015 we launched a free business Internet banking platform to help encourage digital mobility. Smaller businesses can manage their finances very effectively on line.
In support of start-ups, we offer maintenance and transaction free banking and zero cash handling fees to a maximum discount of €100 per quarter. We define start-up as the first two years of business.
Through this combination of people, accessibility, distribution and connectivity, and supported and enabled by our technological and online capabilities, we provide customers with a comprehensive choice of access and supports. We look to bring decision-making and sectoral expertise close to the customers at their place of business. Our commitment to our customers remains, genuinely, our top priority. On behalf of the bank I thank the committee for inviting us before it.
Mary Butler (Waterford, Fianna Fail)
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I thank the witnesses for their submissions.
Niall Collins (Limerick County, Fianna Fail)
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I thank the witnesses for their presentations. As representatives of the banks, do they have any plans to increase the footprint or infrastructure of their branch networks, particularly in smaller rural towns and villages? Following the financial collapse we have had the closure of lots of branches, of the main two banks in particular. This has impacted many communities and businesses. It was a source of much concern to us as public representatives, the banks' customers and people and businesses in communities. Will the witnesses give us an overview of where the banks are with this?
On the mobile bank, as far as I am aware nobody uses it. Perhaps the witnesses have figures to disprove the impression that I have that nobody, or very few people, use it.
Niall Collins (Limerick County, Fianna Fail)
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Bank of Ireland did restrict opening times in some towns.
Mr. Michael Lauhoff:
We have changed the services we provide but only in response to the change in customer behaviour. We had to do that to ensure we retained our branch footprint and could continue to provide a service. We continually review our branch footprint to see if we have appropriate representation. On the question regarding rural branches, we have not opened any new branches in rural locations recently but we have opened branches in Grand Canal Square, Cherrywood and Ardkeen in Waterford and, as I said, we continually monitor our branch footprint. We do not have any plans at this point to close any branches but we do monitor our footprint on an ongoing basis.
Ms Catherine Moroney:
Allied Irish Banks has no plans to close any branches. In terms of our current footprint, our focus is on ensuring we are accessible everywhere. In every town, we either have an AIB branch or an An Post presence, which also takes in cash and coin for our SMEs. We have branches in 275 locations in Ireland and 1,100 An Post services. We do not restrict any services. Cash, coin and cheque services are available in all cases. We have opened some new branches. We have been focusing more on accessibility rather than new physical infrastructure but we have opened a branch in Little Island in Cork and several others in Dublin. We have changed availability by installing lobbies and extending opening hours. We also have mobile advisers and our direct services are available until late in the evening. Interestingly, one of the most avid users of that service is farmers because they prefer to do their banking at home, which surprised us when we made that facility available to customers. We monitor our services carefully. We do not have any top trending complaints from customers in regard to accessibility. We provide a full service offering.
Niall Collins (Limerick County, Fianna Fail)
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On the SME sector, what percentage of that business is channelled through the post office network?
Ms Catherine Moroney:
I do not have that information with me. We have a very sensitive contract with the An Post. I can tell the Deputy that our customers who use An Post are facilitated at the same price point with AIB. Behind that, we have a contract with An Post which is very sensitive. Unfortunately, I am not able to disclose the split in relation to that contract. We have agreed contractually with An Post that we would not discuss matters relating to the contact. All AIB services are available through An Post.
Paul Gavan (Sinn Fein)
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I thank the witnesses for their presentations. How many branches has each of the pillar banks closed in the last decade?
Mr. Michael Lauhoff:
I do not know the exact number of branches that we have closed but it is a single digit. We have not left any town. We have only closed branches in large urban areas. For example, in Limerick we had a branch located at 1-5 O'Connell Street and another branch at 94 O'Connell Street and we amalgamated them into one branch. Other branch closures would have been in similar situations. We have not left any location. We have undertaken branch amalgamations rather than closures.
Paul Gavan (Sinn Fein)
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Is Mr. Lauhoff saying that Bank of Ireland has closed fewer than ten branches?
Ms Catherine Moroney:
Yes, 70. Where we have closed those branches, we applied "close proximity" in a lot of cases. For example, we have a branch which is less than 1 km from Crumlin while in Dun Laoghaire we had two branches which were less than a couple of hundred yards apart. For the most part, it was because AIB was created by the amalgamation of two banks, the Munster and the Leinster, and we had a lot of duplication in towns. In advance of the process, we put in place our contractual relationship with An Post. While we closed 70 branches, we opened 1,100 locations for our clients.
Paul Gavan (Sinn Fein)
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I have a follow up question or two. I do not wish to pick on Ms Moloney; it just happens that these are the statistics. I ask her not to take this personally. I see in the statement that Ms Moloney says business lending and business generally is largely relationship driven. That is not my experience from talking to people in small businesses. In my experience, the banks have withdrawn from their relationships significantly. When one hears that 70 branches have closed, it does not suggest the business is relationship-driven. I suspect that it is a lot less relationship driven, in particular in rural locations and often at the expense of rural customers.
Ms Catherine Moroney:
Starting from the relationship perspective, I would separate the number of branches from the relationship issue. The net promoter score of AIB has risen significantly recently. We have put our relationship heads of business banking and heads of home out into the community. Last year, alone we appointed 19 in every area and we have relationship teams in place there which are dedicated to our customers. We have standards around that in terms of their accessibility. There are two sides to that. One is what I will call a "transactional relationship" in terms of being able to step into an AIB environment and transact, which can be done in person and online. There is then the piece involving advice which creates a requirement for business advisers. We track that and the feedback we get from our clients. One of the things they talk about is the speed of decision-making but they do not tend to talk about not being able to get our people. They are present and available. We are coming through a journey where, speaking very frankly, we have had a number of years in which some of those conversations have been very challenging for customers. Customers in difficulty have 1,500 people behind them. It is a whole resource specialist expert area. That is very much all around engaging and bringing them back to viability. At the front end, our business is fully resourced from a relationship perspective. We watch the complaints from our SMEs very carefully and it is not trending as a key issue for us.
Kevin Humphreys (Labour)
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I thank Ms Moloney for her presentation. I will move quickly to questions. These are the things small businesses have raised with me. It is probably the smaller businesses that have raised issues with me, for example corner shops and pubs which are still finding it challenging to do business. One of the issues raised seems like a simple one in many ways but it points to how precariously some businesses are operating. I refer to access to the lodgment of coins and the cost of that. There are only specific days on which the bank will accept coins. Some small businesses have pointed out to me that they can make lodgments on only two days a week in some branches. That in itself has an impact. A more recent issue pointed out to me relates to overnight lodgments or the "night safe". There is a longer delay with an overnight lodgment compared to a lodgment which is made in the bank in person the following day. Pubs in particular have pointed that out. It has led to them keeping cash overnight rather than using the night safe as they have to meet wages as they come up and so on. It may be a very specific and small area. I am not sure how widely the issue affects businesses.
Has anything been done to analyse interest rates for small and medium businesses compared to our European partners? Do we pay lower or higher interest rates in Ireland?
There seems to be a gap between deposit interest rates in Ireland and the interest rate charged to businesses. That gap appears to be larger in Ireland than it is in the rest of Europe. Why is that? Are we paying for the sins and mistakes of the banking sector? Is the bank trying to right its books by charging higher interest rates to small and medium businesses as well as larger ones?
I turn finally to risk analysis on loans. Is there grading in relation to risk analysis on the interest rates charged by the banks? If there is a higher risk, is there a higher interest rate and, if the risk is lower is the rate lower? What is the grading in the context of that risk analysis and what are the interest rates? I can see that there is not much of a gap between the products the banks offer. There are more lead-in products, but over a period of time, things very much even out. I may have the wrong sense, but is there a lack of competition between the banks in front of us today? Their interest rates seem to be a little on the higher side compared to mainland Europe.
Mary Butler (Waterford, Fianna Fail)
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There were a lot of questions there. Who would like to start?
Ms Catherine Moroney:
I will deal with access to lodgments and all of that and then deal with the interest piece. I start with access. I can state categorically that we do not restrict cash or coins to times of the day. When we are open, we accept notes, coins and cheques. That is our principle and that is what the branches are for. That is a fact. I will say that we also have night safes. There is a payment services directive and we have a point in the day after which the same-day services payments do not happen. It makes no difference whether one puts it into a night safe or comes into a branch, one gets the value. We have night safe drops available for our customers in designated locations. They are aware of those. There is no restriction on days of the week. When we are open, we are open.
We are experimenting with and have developed coin machines ourselves. There is one in Naas and one in Blanchardstown. These are experimenting with taking coins at other hours and in other ways from our customers. That is in addition to and not instead of the availability of over the counter services. I think I have answered all of the questions in that regard.
I think the Senator wanted a comment on the price of daily banking. To make an overall statement, it is a very cost-heavy business. We seek, overall, to break even in that business but we provide the most competitive price for cash and coin in the Irish market in AIB. I will take any other questions the Senator has on that, but that is the overarching principle.
I move to interest rates. I might start with deposits because the Senator asked about both sides of the book, deposits and-----
Kevin Humphreys (Labour)
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It was the large differential.
Ms Catherine Moroney:
Starting with deposit interest rates, if we seek to put money on deposit with the Central Bank, which we have to do overnight, it charges us. I might be out by a basis point or two, but in the past day or two it has been approximately -44 basis points. As a principle, we have decided not to charge our customers for that. We absorb the cost. We have very low 0.0 percentage rates on demand deposits, which go up slightly. They are not very high-earning accounts, but equally we do not charge customers for the privilege of leaving that money in a deposit account safely. The exception is in circumstances where someone comes to us outside of relationship banking. If a very large corporate came to us to put €20 million on deposit, it would be a one-to-one discussion. Clearly, it would be very expensive for us to hold that on our books.
We do not charge for all small and medium enterprises and businesses in Ireland. That addresses that side of the balance sheet.
On the loan side of the balance sheet, I will start with the comparison with Europe and then move to Ireland. It is difficult to get international comparisons for this. I will use Germany as an example and then move to our own specific price points. I will speak about Germany's general lending rate. I say "general" since the Senator mentioned credit risk himself and there are different credit risks in time, length of working capital and whether it is committed-----
Kevin Humphreys (Labour)
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A major player in Germany is a not-for-profit which lends to SMEs.
Kevin Humphreys (Labour)
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A major lender in the German market is a not-for-profit.
Kevin Humphreys (Labour)
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That needs to be considered in the comparison.
Ms Catherine Moroney:
I will engage in a broadly like-for-like comparison. The current German bank lending rate to customers, in Deutsche Bank, is 2.5% for one to five years, and 2.8% for one to three years. It is just under 3%. I will say at the outset that European banks, in their bank lending rates, do not include all of their charges. European banks have a tendency to charge arrangement fees and administration fees on top of the margin. That is certainly not a practice in AIB, except for very large numbers, for example if somebody was financing a bridge and €200 million was involved. We do not charge arrangement fees for the general customer. That is quite a significant difference when APRs are compared as opposed to interest rates, which is the all-in cost. Taking it from there and taking it that German rates for customers are just under 3%, we have a series of published rates and negotiated rates for bigger ticket loans. That will reintegrate in a moment. This is a sensitive area because it is competitive and, therefore, I will stick to the average banded rate. The average banded rate on our book - the factually correct one, checked by our finance unit - is 4.75%. It is more expensive than the European market. I will come back to the reasons for that in a moment. That is the average. There are higher rates. The negotiated rate is lower than that. By negotiated, I mean that when numbers move from €30,000 to €50,000 and to over €300,000, there will be a higher rate.
Before I move on from Germany and to our own book, German businesses tend to be larger than ours. Europe defines a small to medium-sized enterprise and we use this in some of our reports. A company with a turnover of less than €50 million and an asset base of €43 million would be considered very large here. A good parameter in the SME code in 2015 went as low as €10 million. That was done to ensure that as many businesses as possible had the protection of the code. That net was, understandably, cast wide. That moves to the issue that the cost of doing business in countries such as Germany, in reality, can be spread over bigger ticket deals and they get the negotiated blended price more often than we do. I am trying to ensure that I cover all the Senator's questions. I have covered deposits and lending, and I think that grading and risk analysis was his other question. I should say, on the costs, before I finish, that other European countries are bigger so their operational costs are spread out. Those margins are from before the cost of credit risk is taken, which is unfortunately higher here, and the cost of running the business.
We grade our book and it is an obligation with regard to capital rules to make sure that we grade our book. That leaves both the regulator here and elsewhere on the prudential side in a position to be able to see the quality of the book. That was a big lesson from the crisis. While this is competitively sensitive, each bank would grade their books within set parameters. There are scorecards which are constantly monitored in order to do that.
InnovFin recently looked at that for us across our book and benchmarked it against Standard & Poor's. It is quite a robust grading. That is used for a number of purposes, including the good management and functioning of the bank. Secondly, it is used in pricing. We try to use it in a way that is as fair as possible to the overall book. For example, in that guaranteed position I mentioned of 48 hours for under €60,000, we have both variable rates and a fixed rate of 6.95% because it is for very small loans. The smaller the ticket, the more expensive the loans since they are higher risk. We try to blend the grading and give a simplified price point. If businesses are looking for funds for 12 months or longer for that same size and moving up the size curve, we have a variable rate of 5.5%. The customer can have a fixed rate if he or she wants certainty of payment or can stay on a variable rate. Customers can come out of the fixed rate without experiencing great costs. I hope that answers all the questions.
Kevin Humphreys (Labour)
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I will give Ms Moroney about three more.
Mr. Michael Lauhoff:
I will try to remember all the questions too. On the coin and the days of service, as I said at the outset, Bank of Ireland has the largest bank branch network in the country. We have not left the towns that we were based in. To do that, we have had to look at how we provide that service. We focus on making sure that we can provide the day-to-day transaction requirements as efficiently as possible and free up the time of people who work in the branches to spend it talking to customers about more complex financial needs such as lending requirements and so on. That has been the focus of our strategy. That means we have changed how we provide some services in branches. At one point, we had a trial of having the full cash offering on certain days. That has been changed in those branches so that it is now an all-morning service. Customers said they would prefer to have it every day rather than on specific days but with limited hours. That is generally working well in those branches. We also have branches which provide full day-to-day transactional banking throughout the day.
I am not aware of specific issues with delays in lodgments to night safes being processed. If there are specific cases, I would be happy to look into it afterwards.
A number of points about interest rates have been covered already. Deposit rates are very low in the Irish market. When we look at our cost of funding to fund lending, all sorts of finance is brought into that. Deposits and credit balance sitting in people's current accounts is part of that source.
The point about fees being the European norm is also relevant. Arrangement fees and administration fees are more standard in Europe than in Ireland. Loan tenors are very different. In Ireland, a commercial mortgage debt could have a term of seven to 15 years, while the average in Europe is far shorter. When fees are paid at renegotiation, that adds to the overall cost but when one looks at the banner headline interest rate, it is quite a bit lower. A key point for the Irish market is that the financial crisis in Ireland was far more severe than in most parts of Europe. That has impacted on the credit history on the books. From a regulatory and ECB perspective, the capital requirements relating to what we have to hold as a bank against our lending is substantially higher than it would be in most parts of Europe. That adds to the cost of providing credit and has an impact on those interest rates. In summary, on the interest rate side, we looked at Europe to see what the key differences are and what we can do, but it is born of a number of features of the Irish market that are different to Europe.
On the risk analysis of rates, aspects of this are commercially sensitive but for larger facilities, every case would be assessed on its own merits and the risk rating attached to it would determine what rate would be available to that borrower. It is done on a case-by-case basis. There are more set interest rates for smaller businesses which depend on the nature of the facility being requested, whether tangible security was provided against it or it was an insecure facility. All those features are taken into account when considering overall pricing of lending.
I have covered most of the questions; much of it was addressed in the original presentation.
Kevin Humphreys (Labour)
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It would be neglectful of me not to return to the issue of interest rates. When we talk about smaller loans, especially in Ireland where we are particularly focused on smaller businesses, with fixed rates of 6.9%, 7% or 5.5%, it is accepted there is not a lot of difference between the banks. AIB answered that question specifically so I am asking Bank of Ireland. That is generally the percentage rate.
Kevin Humphreys (Labour)
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There is not an enormous difference on a deposit rate, which is pretty close to zero. The access to Central Bank funds is an issue. I accept the bank is penalised for lodging money to the Central Bank. The cost of doing business is quite high for small businesses at the 6.9% and 5.5% rates. I would like to see more analysis of what is deemed to be a small loan. A small loan is probably penalised at the higher rate. The fixed rate is 5.5%. Will the witnesses provide more analysis in this regard to the committee, not today but at a later stage? For shops, pubs and small enterprises trying to get off the ground, paying interest rates of around 7% is quite difficult.
Maurice Quinlivan (Limerick City, Sinn Fein)
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I apologise that I had to leave before the presentations but I had a chance to read them before the committee met. Ms Moroney used the word "fact" in response to Senator Humphreys' question. She said people can come into the bank's branches with coins. Do they have to make an appointment to do that?
Maurice Quinlivan (Limerick City, Sinn Fein)
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Can they come in any time during the day?
Maurice Quinlivan (Limerick City, Sinn Fein)
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It is an issue raised with us all the time. In Limerick I was told in some places they have to-----
Maurice Quinlivan (Limerick City, Sinn Fein)
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Ms Moroney said the bank had appointed 21 SME Brexit advisers and is encouraging its customers to be proactive. What exactly do they do? What was the idea behind employing them? I was talking to InterTradeIreland this week. It has surveyed all the businesses, which it does on a regular basis. In the last survey, it found that 98% of businesses were not prepared for Brexit. What do the 21 advisers the bank has employed do? Are they new appointments to the bank or are they people who have been transferred internally?
Ms Catherine Moroney:
They had to apply for the jobs. They were people who were keen to do it and had an interest in it. By way of backdrop, we fully trained them. It is not that businesses are unaware of Brexit. It is that they are not sure what they have to do yet. We have a Brexit sentiment tracker to track the sentiment of our customers. We have done two of them now. They have told us that in some cases businesses are saying they cannot get ready for tariffs because they do not know if they will apply or not. They do not want to waste time and money on it. They have not prepared for anything that has not happened yet. A more immediate issue is that where they have currency exposures they are covering them. Not doing something is the same as doing something in terms of taking a risk. The Brexit advisers are doing a number of things. Having been trained and appointed to the role, they are working with our relationship managers and customers to advise and encourage them to speak to us about covering their hedging exposures. We have regular two-way briefs and updates with them. They listen to our updates on impacts on particular sectors. They give us feedback from the customer which means we stay close to the voice of the customer. That feedback goes to our Brexit board to ensure we are aware of what is happening right at the coalface.
Their role will continue into this year. We will have a number of events - we have had a number already - attended by several hundred customers around the country. They will continue to support bringing these events out into the community to our customers. The key thing is to be ready when we are aware of outcomes to know what the implications of these are for the different sectors and to be able to act with customers. They are there in readiness for what is coming and to encourage customers to do what they can, in terms of their currency exposure.
Maurice Quinlivan (Limerick City, Sinn Fein)
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Thank you for that response which is appreciated. Are there 21 people just engaged with Brexit alone?
Ms Catherine Mooney:
They have other roles in advising customers. That would be part of their roles, but they are specialists in this so it would be one of their top priorities. These are experienced lenders as well. I know it is not all about lending but in terms of currency exposure and lending relating to Brexit, that is quite important.
Mary Butler (Waterford, Fianna Fail)
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That was a question I was going to ask. Just to clarify, were any of these 21 staff members new hires or were all redeployed from within the company?
James Reilly (Fine Gael)
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Some of the questions I wanted to ask have been asked so I will not repeat them. First, welcome to you all and thank you for your presentations. I am sorry I missed the beginning of Mr. O' Regan's presentation but I have his document here. Banking is critical to our economy, critical to SMEs and critical to many of us in many walks of life. However there are concerns about the cost of doing business in this country, and banking and the cost of finance is one of the major ones for most people in business. I hope, with the Chair's agreement, that the witnesses would be open to coming back again to give us their view on what they see as the cost of doing business outside of their own direct remit. I would like to hear what they have learned from their customers and the tremendous resource they have in that regard. On the second page of Mr. O' Regan's document he states that access to finance is not a significant challenge for most Irish SMEs. I wonder if we put the words "affordable finance" in there, how that would then read. The document also states that Irish SMEs face a number of important challenges and access to finance is not prominent among them but I will come back to that.
The Central Bank issued a report earlier today and some things jump out. One is that SME loan rejection rates in Ireland have increased to 13.9% in September 2017 from 8.2% in March 2017. Clearly those looking for loans are still having huge difficultly in getting them. Interest rates - and this has been touched on by Senator Humphreys - for non-financial corporate loans, below €0.25 million stood at 5% in July 2017, that is higher than in comparator countries, while the interest rate gap between loans below €0.25 million and loans above €1 million stood at 2.9% in Ireland, which is also above comparator countries. Issuance of new loans up to €1 million expressed as a proportion of domestic demand was 2.1% in Ireland, as of quarter 2, 2017. This ratio is considerably lower than EA2 comparator countries. This would seem to indicate that access to credit for many SMEs in this country is a problem and that its affordability is yet another problem.
I wanted to make a few comments on some of the presentations. AIB has already outlined how many branches have been closed. I am very interested in its move to join forces with An Post to deliver services locally. How will this work in terms of lodgments, loans, charges for services etc.? I welcome the 21 Brexit advisers, but again I would like to raise one other issue. We talked about Germany, in particular, and we spoke about European rates. We can talk about Germany being a huge economy but there are many other smaller economies than ours in Europe.
Their rates are not as high as ours. The explanations given do not necessarily stand up to scrutiny but we can return to that, and I would be glad of the witnesses' comments on it. I do not have the figures for the smaller economies such as Luxembourg and Malta. An issue that concerns me is the cost of overdrafts. Many business loans run as overdrafts rather than loans and the charges here can be up to 15%. These loans would be charged at around 3% in Germany. That is a hell of a differential. I will not go into the other areas because I am the last speaker and other people are waiting outside. We are ten minutes over our time, but I would like a response to that. There is a long way to go to further explain why our rates are higher than in other countries and why the increase in rejection rate to SMEs went up in the six-month period between March and September of last year.
Mr. Felix O'Regan:
I do not doubt the figures from the Central Bank report today. I have not seen those figures. The ones I have brought along with me are from the SME credit demand survey which is undertaken for the Department of Finance. There is one due out in about two months' time but the last one covers the period up to around the middle of 2017. The rate of loan application decline was 11%, which is up marginally from 10% in the previous period. We will wait to see if the Central Bank figure is reflected in this very specific survey which is designed to establish acceptance and decline rates.
James Reilly (Fine Gael)
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Does that equal rejection?
Mr. Felix O'Regan:
Yes. I can check and come back to the committee with information on the comparator for other European countries. My sense is that a decline rate of 10%, 11% or 12% is not out of line with the European average but I am happy to come back to the committee on that. I do not have the figures with me but I am happy to come back to the committee to see how they actually stack up.
Mr. Michael Lauhoff:
The Senator covered a number of issues. We did not see any material increase in decline rates over that period. Not all businesses are credit ready. We do not approve everything, for example if a business is pre-revenue or dealing with other challenges, but we certainly have not seen any material change in approval rates over that period. With regard to the cost of finance and whether it is a prohibitive factor, the ECB carries out a survey of SMEs and in its most recent survey the cost of credit, or interest rates being too high, was a reason for less than 5% of businesses not approaching banks for credit. The predominant reason for not approaching banks for credit was that businesses did not need that type of financing. While I appreciate the point about Ireland's interest rates relative to Europe's, for which there are core reasons, it does not appear from the surveys we have seen to be a reason to stop businesses from borrowing.
James Reilly (Fine Gael)
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According to a different section of the report that was given to me, the share of SMEs in Ireland reporting they did not apply for bank loans because of sufficient internal funding was 50.4%, which is about the same as in the rest of Europe. That means that more than 48% do not have sufficient internal funding and have other reasons. I find it difficult to believe that cost is a reason in only 5% of cases.
Mr. Michael Lauhoff:
I took that figure from the ECB survey. There are other reasons. That is why we are trying to work with customers to understand exactly what their requirements are and how we can provide the funding.
Rates of up to 15% were mentioned. In general, our highest overdraft rate for businesses is just over 8% and it then depends on the size and scale of the business. Overdraft usage has continually declined in recent years. At this point, the percentage of overall overdraft usage is in the low twenties. Among our SME customers as a general base, we see the cash generating ability of the businesses as very high. When we look at credit balances, cash reserves and overdraft utilisation, they all point to significant reserves being built up by businesses and the use of some of these reserves for future investment. We do not think this is the best way to fund future investment and it should be a mix of reserves and bank debt to ensure the long-term sustainability of the business, but overdraft utilisation has continually decreased since the financial crisis.
James Reilly (Fine Gael)
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I want clarity on this. In the main, the overdraft rate is approximately 8% but is Mr. Lauhoff stating no overdraft rates of 15% are being charged?
James Reilly (Fine Gael)
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Regardless of credit history.
Kevin Humphreys (Labour)
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I wish to ask a supplementary question on overdrafts. I have come across encouragement being given, and I will not state a specific financial institution, to an individual to allow his private account to be overdrawn rather than his business account.
Kevin Humphreys (Labour)
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What is the interest rate for a personal overdraft? I have heard about the same interest rates.
James Reilly (Fine Gael)
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If it does not apply to business, where does it apply?
Kevin Humphreys (Labour)
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Yes, where does it apply?
Kevin Humphreys (Labour)
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I have heard the same thing as Senator Reilly. Sometimes the wrong question is asked.
Mary Butler (Waterford, Fianna Fail)
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I have a question for Mr. O'Regan and it is similar to what Senator O'Reilly asked about with regard to access to finance. It has been stated it is not a significant challenge for most Irish SMEs and that it sits at approximately 8%. We have had a series of meetings and many organisations have come before the committee, and that is not the reading we are getting. My colleagues will agree with me that access to finance is an issue. Do the witnesses have any figures on the percentage of SME loan applications accepted? What are the main reasons, apart from the obvious, that loan applications from SMEs are rejected? These are very valid points.
My next question is for Mr. Lauhoff. He mentioned Brexit working capital loans, and Bank of Ireland has been allocated €128 million. I presume other organisations have been also allocated money. Is it only SMEs exposed specifically to Brexit that can access this finance? It is something the Government announced last year. Are there very strict criteria for SMEs to try to avail of this working capital if they are specifically exposed to Brexit?
Mr. Michael Lauhoff:
The specific details of the Brexit working capital scheme have not been finalised. There is a requirement for a Brexit impact, but what this means in terms of how detailed it is has not been finalised yet with the Strategic Banking Corporation of Ireland. The aim of this facility is to support businesses in the context of Brexit, and it is available where businesses are looking to expand their markets or are negatively impacted. From our engagement at this point, I believe it is about how to support openly rather than trying to be restrictive.
Mary Butler (Waterford, Fianna Fail)
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Does Mr. Lauhoff expect that in 2018 some of this capital will become available to SMEs exposed to Brexit? Does he expect it will happen sooner rather than later? The banks do not have the criteria and we are at the end of January.
Mary Butler (Waterford, Fianna Fail)
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Does Ms Moroney have the same opinion?
Mary Butler (Waterford, Fianna Fail)
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Will the conditions be set down by the Government or by the banking federation?
Mary Butler (Waterford, Fianna Fail)
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Do the witnesses have percentages on the number of SME loan applications accepted or rejected?
Ms Catherine Moroney:
Our approval rate for SME loans, which has always been consistently above the average, is 96 out of 100. We register them all. On seeing the report this morning, I checked what our figures were up to that period, which is September. I cannot go beyond December because we are in our closed period. We still approve 96%.
Mary Butler (Waterford, Fianna Fail)
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Does Ms Moroney know what percentage of that 96% concern loans of less than €60,000? Am I correct in saying Ms Moroney said quite a lot of AIB's loans are of less than €60,000?
Ms Catherine Moroney:
I am guessing. Of loans granted, 92% are very small and micro. Most of our ticket sizes are below €30,000. When one talks about the volume of ticket sizes, the value will skew that, but the figure I am giving the committee - approval in 96 of every 100 cases - is across the whole SME book, if that helps.
Mary Butler (Waterford, Fianna Fail)
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Senator O'Reilly did not get an answer-----
James Reilly (Fine Gael)
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We did not afford Ms Moroney the opportunity to answer the questions I put to her.
Mary Butler (Waterford, Fianna Fail)
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I apologise. I came in too quickly.
James Reilly (Fine Gael)
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I have no doubt but that the able Ms Brennan will have them all written down.
Ms Catherine Moroney:
I will go back to the Senator's first question. I think he was talking about the approval rate, which we have just discussed. One thing I will add to that, if I may, is that the credit demand survey to which Mr. O'Regan referred has a comment in it, as I recall, to the effect that the portion of credit from the pillar banks was down from 88% to 75%. This would indicate that there are more players in there, and that might be changing the dynamics and the statistics. That second comment is an extrapolation on my part, but that mix is changing slightly. Going back to the pie chart shown at the beginning showing the other players coming in, the other thing the credit demand survey told us is that in that six months to March 2017 the demand was still there but it was at 20%, whereas it had been at 26%. That is what that demand is telling us, and when that is combined with everything else - I am now addressing the demand, as opposed to the access question - it appears certain things have impacted it.
I wish to add to the Brexit question the comment to which Senator Reilly referred earlier. The percentage surveyed that had experienced an increase in their turnover was 42%. This indicated that increase in turnover was flowing into their cashflow, so their use of working capital was not as acute. They were coming back into a healthy position in their cashflow. The question of a market dynamic should be added to that conversation.
The Senator's next question concerned overdraft rates. Our overdraft rate for businesses is 7.85%.
James Reilly (Fine Gael)
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What is it for persons?
James Reilly (Fine Gael)
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There are no rates of 15%.
Ms Catherine Moroney:
I am not aware of any rate of 15%. One thing I will say to the Senator about those overdraft facilities, and I would like to say this about Europe as this is really important from a European and an Irish perspective, is that in Ireland - we are part of this as well, so I am not saying this only concerns SMEs - we have a huge appetite for the use of overdraft facilities, much more so than the rest of Europe. It is very flexible, it is understandable, it is there and one does not pay for it when one does not use it, even though we have to keep the capital so we must assume it will be used at some stage. However, one only pays for it when one uses it. The committee displayed a chart earlier that showed the use of trade credit in European and other countries. They have a much stronger propensity to use revolver-type and trade-type facilities. We have a farm credit facility to help with stocking and IPF facilities. I quoted an average blended rate of 4.75% earlier. Some of those rates are competitively sensitive and to the benefit of the customer. They are all below that average blended rate. We are trying to encourage our customers to use those working capital facilities to manage both the cost and their cashflow and to be less reliant on the overdraft. The overdraft is an option that is there if they need to use it.
It would not be the best advice to tell someone to use his or her personal account instead of his or her business account. That just would not be good advice, but I think-----
Mary Butler (Waterford, Fianna Fail)
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Does Deputy Collins wish to come back in?
James Reilly (Fine Gael)
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The last question I asked, and the most intriguing from my point of view, is how the post office arrangement works.
Ms Catherine Moroney:
I am just about to answer that question. Cheques are accepted in 115 of them, and we have that arrangement with them where that is necessary. It should be remembered that we accept cash and cheques in all our facilities at all times of the day, and then the post offices accept cash from us everywhere and cheques in 115 of their locations. I think the Senator asked a question about the price as well. It is the same price to the customer. If our customer lodges in An Post or AIB, it is the same price and it comes through us. We have a separate confidential arrangement with An Post in terms of what we-----
James Reilly (Fine Gael)
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I accept it is commercially sensitive.
Mary Butler (Waterford, Fianna Fail)
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Senator Reilly asked whether one can borrow from the post office and the answer is "no".
James Reilly (Fine Gael)
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I asked whether one can borrow through the post office.
James Reilly (Fine Gael)
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The post offices in their own right can accept cheques, can they not? Do they not change cheques for pensioners?
Mary Butler (Waterford, Fianna Fail)
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I will let Deputy Collins in first and then Mr. O'Regan may come back in.
Niall Collins (Limerick County, Fianna Fail)
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What is AIB's position on the sale of loans to SMEs to vulture funds? It is an issue that obviously causes the borrower a lot of grief. Many of the complaints are to the effect that the first the borrower hears of it is when the vulture fund or credit servicing agency that is engaged contacts the borrower. Can the witnesses tell the committee the number of loans to SMEs that have been sold to vulture funds to date? What is their present policy? Are they still engaged in selling some of their loan books which are SME-related to vulture funds? Do they engage with the borrower in advance of the sale? What is their position in this regard?
Mary Butler (Waterford, Fianna Fail)
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I will add just one question to Deputy Collins's before we wrap up the session. It might be similar to his. How has Bank of Ireland dealt with the issue of legacy debt for SMEs? I ask the witnesses to include that question in their responses.
Mr. Michael Lauhoff:
To answer Deputy Collins's question, we have not sold any loans, full stop, whether SME or consumer, in Bank of Ireland. It is not something we have used as a method for reducing non-performing exposures, so the answer is "none". We have worked extensively with businesses that have had their debts sold by other institutions to try to help refinance them into more sustainable debt positions and to fund those businesses into the future. However, we have not sold any loans to any other providers.
Regarding businesses with legacy debt, our primary focus with any business is on trying to bring that debt back down to a sustainable position. This means working with customers to understand assets that may not be core to the business and agreeing milestones with them for the disposal of some of those assets, lengthening the terms on facilities but working with them on a case-by-case basis to understand what is that sustainable level of debt that the business can carry into the future and putting a structure in place that they can deliver on to get there.
Mary Butler (Waterford, Fianna Fail)
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Bank of Ireland is prepared to look at this on a case-by-case basis.
Mary Butler (Waterford, Fianna Fail)
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Mr. O'Regan wanted to come in.
Mr. Felix O'Regan:
It was on the issue of loan declines. As both banks have said, they are accepting the vast majority of loan applications, but it is important to note that even where loans are declined by mainstream lenders, there is a system whereby that customer can be referred to Microfinance Ireland. Microfinance Ireland provides loans of up to €25,000 and, as one of my charts showed earlier, €18 million has been lent over the past five years. It is often the case that some of that lending is supplementary to the banks. In other words, the bank may tell the borrower it is not prepared to give him or her 100% of what he or she wants but it will co-fund and co-finance the borrower in conjunction with MFI. That is just a point in support of the bigger picture of banks and non-banks frequently working together in support of the SME borrower.
We have not sold any SME loan to any equity fund. We had one sale of a buy-to-let portfolio, and that comprised debts that were not engaging. To come back to the question on legacy debt, our primary priority for our SME customers, and for all our customers, is viability. We have full documentation on the Internet to help customers understand the journey. Our first request of them is to engage with us and give us full disclosure, and our first priority is to see them back to viability if it is a business. I am speaking specifically about SMEs, and it is the same for personal loans. Our first priority is to get back to viability. We have not had any sale to any equity fund on the SME side. We do everything we can and it is never too late. Even if customers are getting to a point where they have not been engaging and other action has to be taken, at any stage in the process they can come back and re-engage and we will work with them. We have restructured 20,000 SMEs at this point.
Mary Butler (Waterford, Fianna Fail)
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Does the bank also work on a case by case basis?
Mary Butler (Waterford, Fianna Fail)
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I understand.
Mary Butler (Waterford, Fianna Fail)
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I thank the witnesses for coming here today and engaging with the committee. I propose we suspend for a moment to allow our next guests to take their seats.
Mary Butler (Waterford, Fianna Fail)
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I welcome Mr. Ed Farrell, chief executive officer of the Irish League of Credit Unions, ILCU; Mr. Kevin Johnson, chief executive officer of the Credit Union Development Association, CUDA; Mr. Tim Molan, Chairperson of the Credit Union Managers Association, CUMA; Mr. Seamus Boland, chief executive officer and Ms Sinead Dooley, Irish Rural Link; Mr. Harald Felzen, Savings Bank Foundation for International Cooperation, Sparkassen to the second session of the meeting to discuss the cost of doing business.
By virtue of section 17(2)(l) 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 in relation to a particular matter and they 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 they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that a member 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.
I remind our guests that their presentations should be no more than five minutes in duration. Members have already received their copies of their submissions and presentations. I invite Mr. Farrell to make his presentation.
Mr. Ed Farrell:
I thank the Chairman for her invitation to appear before the Joint Committee on Business, Enterprise and Innovation. The Irish League of Credit Unions, ILCU, represents 260 credit unions in the Republic of Ireland which have more than 3 million members. For the ILCU this engagement today is timely and important. Under existing legislation and regulations credit unions can lend to SMEs and many credit unions already provide such credit. Increased levels of business lending, together with more lending for home loans and investing in social housing was the essential new direction we determined to embark upon in 2015. They were among the very short list of key specifics we spelled out in our Six Strategic Steps policy document before the last election. That document was and is our platform for policy and regulatory change.
On lending to SMEs, and because of the priority the league attaches to the sector, we developed a detailed SME Lending Proposal, published in 2016. We are here today with that thought-out plan, and with the ambition to deliver on it. Our policy proposal is based on the fact that credit unions have a footprint across the country. We have members’ funds on deposit available for new forms of lending. Our vision for credit unions, as banks retreat from a physical presence in communities and as key decision makers become ever harder to access in person, is for a democratic, volunteer-led, community-based, highly professional and financially prudent credit union movement. It is one where you can meet face to face with the person you need to see. It is a dynamic resource for development in local communities. Credit unions are there for people and provide the very smallest loans for the neediest, home loans for the house one's family will live in and business loans for the enterprise people make their living from.
Credit unions are not a separate enterprise that has an office in the community. We are a community who save and borrow together. Our money does not come from the markets but it is loaned on trust from one to another. That common bond, which defines each credit union community, is our essential characteristic and our underlying discipline. It is also our essential legal framework. Our proposal on small and medium enterprise, SME, lending reflects that. We are very encouraged that the committee members' colleagues on the Oireachtas Joint Committee on Finance, Public Expenditure and Reform and Taoiseach in their report on the review of the credit union sector last October strongly supported the common bond. As credit unions we are determined to change our business model but we are also determined to keep our credit union values.
Our proposition is that credit unions, regardless of size, would participate in a State-backed vehicle that would enable a national network of credit unions to act as an efficient distribution network to originate SME loan applications. It would enable credit unions to invest in a funding facility that will lend to SMEs across Ireland. This would marry the local network and the local knowledge of credit unions with the expertise needed for business lending on any scale. It would ensure access locally and it would ensure prudential lending. It would ensure that this expertise would be available through a State-backed investment vehicle to all credit unions, regardless of their size. Our submission to the recent Central Bank consultation paper on credit union investments included this proposed model. Credit unions are community-based and this model is pro-community and pro-business. To ensure that a start is made, we also propose that this scheme could be piloted with a small pool of well-capitalised and large credit unions at the outset. We are principled about what we want to do and we are practical about how we go about delivering it. Our vision for SME lending also includes agri-lending.
Given the economic importance of SMEs to the overall well-being of the economy, credit unions have a strategic interest in supporting the sector. Commercial lending is by nature more risky than personal lending so the formation of a centralised vehicle to lend to the SME sector would enable a stronger centralised risk management capability. It would be the means whereby dedicated and skilled resources to identify, access, measure and manage credit and operational risks could be brought to bear in a cost-effective way. It would facilitate credit unions supporting the commercial loans market and it would do so in a manner that provides robust mitigation against risk and, above all, protects members' funds effectively. This proposal would enhance competition in the market and deliver on this committee’s objective of addressing "the cost of doing business". It was sent to all Oireachtas Members and relevant Departments; the challenge now, and it is a political challenge, is to move on from support in principle to concerted action.
Mr. Kevin Johnson:
We are grateful to the committee for inviting us to discuss our perspective on the scope of credit unions to take an enhanced role on lending to SMEs. We will discuss our views on the extension of their role in the area and give proposals on how credit unions can engage to a greater degree with small businesses.
The Credit Union Development Association, CUDA, was incorporated in 2002 and currently has 48 of the most professional progressive credit unions in its membership, which in turn manage approximately a third of the total Irish credit union assets of €16.8 billion. It is clear Ireland's credit unions are putting the recession behind them and continue to grow. Our sector has undergone a period of massive consolidation, with more than 80 mergers completed during the lifetime of ReBo, addressing some of the larger scale issues that have been hindering progress. That said, most credit unions are still too small in scale to develop their own unique products and marketing campaigns. Hence, there is a need to collaborate to remain viable.
The years 2016 and 2017 saw a rapid increase in the level of co-operation between credit unions. Co-operation initially focused on shared management service arrangements, such as regulatory compliance and risk management, but this has since expanded to the undertaking of significant projects supported by a full risk analysis that are enabling a more expedient regulatory approval process.
The establishment of the Solution Centre has come on the back of this work. The Solution Centre is a not-for-profit hot house unit tasked with developing specialist products, supports and solutions for credit unions. With 48 credit unions coming together under the Solution Centre umbrella, we now have a structure to enable credit unions to achieve their goal of continuing as consumer-owned co-operatives while delivering much-needed new products and services to members.
CUDA has two core ambitions for 2018. The first is to increase collaboration between credit unions and the second is to help bring about some much-needed regulatory and legislative modernisation and enhancement. The Solution Centre's first offering was its Facebook digital loan service, which saw participating credit unions experience a ten-fold increase in their interaction with younger adult members. Loan applications through social media now account for up to 20% of all loan inquiries for some credit unions. Since the Solution Centre launched its mortgage solution in the middle of 2017, almost €20 million in mortgage lending has already been processed, with €9 million drawn down and a further €11 million in the pipeline. Volumes are expected to grow significantly in 2018 as an increasing number of credit unions sign up to the service. Recent research indicates that over 59% of credit union members and 38% of non-credit union members would consider switching their mortgage to a credit union if a better deal was offered. Another example of what can be achieved through collaboration is the excellent Cultivate initiative, which was commenced by four Galway credit unions and provides short to medium-term loan opportunities built specifically around the growing needs of their farming members. The Solution Centre was delighted to be able to contribute to its development.
A report compiled by the Commission on Credit Unions in March 2012 recommended that credit unions with the correct business model could deliver lending to the business sector. The introduction of proportionate regulations in 2018 as set out by the commission allows for credit unions to develop and offer a greater range of services to include SME loans and mortgages, with only those credit unions with the necessary expertise to manage the additional inherent risks being permitted to engage. Many credit unions have a significant appetite for alternative lending and investment products and under the right conditions they would welcome the opportunity to lend to small and medium enterprises. Credit unions are financially strong and have excessive liquidity holdings. They also have an in-depth knowledge of their communities and local businesses, as well as a strong understanding of the risk profile of members. In tandem with the accompanying management and advisory support structures that the Solution Centre has to offer, there are numerous credit unions throughout the country that could provide viable business loans to SMEs in the region of €10,000 to €50,000.
Support such as underwriters with specialist training in SME lending, staff with detailed knowledge of business planning and financial risk analysis, as well as a variety of other dedicated resources and expertise, could serve to protect credit union loan risk. A small number of credit unions already have this expertise in-house and the Solution Centre is positioned to provide support to those that do not. We firmly believe the provision of direct SME loans should only be considered by credit unions that have access to appropriately skilled resources and risk assessment procedures.
There are several factors that prevent SME lending by the wider credit union sector in this country. Some credit unions have had negative experiences in business lending, especially with start-up enterprises, which are regarded as highly specialised and a high-risk area. The Solution Centre is planning to develop an SME framework of policies, borrower documentation and various other requirements to ensure credit unions conduct this business in a compliant manner. This will be complimented with a range of training supports to enable credit unions with the financial and operational abilities to do so more SME business for themselves.
We were pleased to gain some amendments for credit unions during the consultation on the Central Bank (Supervision and Enforcement) Act 2013, with section 48 relating to lending to small and medium enterprises, as we work our way through developing the SME lending framework we are encountering potential legislative and regulatory challenges. For example, section 17 of the Credit Union Act imposes certain membership eligibility requirements. The 2016 regulations impose concentration limits and section 6 of the Credit Union Act renders it impossible for credit unions to introduce business to each other.
Availability of locally based funding to SME and agri sectors is essential and credit unions are ideally placed to extend these lending facilities.
The Credit Union Development Association, CUDA, is very open to collaborating with any organisations that can assist with the upskilling and delivery of an extension of the role of credit unions in the area of providing credit to SMEs.
Once again, I thank the Chairman for the opportunity to put forward our perspective and we look forward to answering any questions members may have.
Mary Butler (Waterford, Fianna Fail)
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I thank Mr. Johnson and I invite Mr. Molan to make his presentation.
Mr. Tim Molan:
I thank the Chairman and members for this opportunity to address the Joint Committee on Business, Enterprise and Innovation.
The good news, which is drawn from the Central Bank of Ireland’s report “Financial Conditions of Credit Unions 2012-2017” states: “New loans advances have increased by 43 per cent with €1.7 billion of loans advanced in 2012 and €2.4 billion of loans advanced in 2017.” Credit Unions are actively lending. Demand for our loans is growing. The same report of the Central Bank of Ireland shows that we have retained our 34% share of the personal lending market.
Commercial lending is a small part of our overall business, accounting for 1.3% of national credit union loans, that is approximately 0.4% of our assets. It is worthwhile bearing that figure in mind in terms of the capacity of the credit unions. Thus, there is significant capacity for expansion of this portfolio, given the right circumstances and conditions. A number of credit unions are currently engaged in micro-lending and small-business lending on a local basis. Some have engaged with local enterprise boards in the past in terms of advancing that objective.
In a credit union context, commercial lending is not as simplified as personal lending. Funds are usually advanced as a personal loan, not as a loan to a limited company. SI 1 of 2016 limits the overall total of commercial loans to 50% of a credit unions regulatory reserve. This would amount to approximately 5% to 6% of a credit union’s assets. Given that at present we have commercial loans to the extent of 0.4%, there is capacity for lending with the current constraints. The statutory instrument specifies that a credit union shall only grant a commercial loan ... where a comprehensive business plan and detailed financial projections (supported by evidence based assumptions), appropriate for the scale and complexity of the loan, are provided and in place before granting the relevant loan. This is a sensible perspective.
Commercial lending is possible, within a very clearly defined framework.
All credit unions acknowledge the complexity of lending to start-ups and SMEs. We acknowledge that a very specialist skills set is required for commercial lending. We, as ethical lenders, have a responsibility to lend responsibly, to ensure that our lending will deliver benefit rather than load an unsustainable burden on the borrower. Many credit unions acknowledge that expertise in this specialist field is expensive, scarce and needs to be developed within our sector. Whereas this expertise might be unaffordable individually, a combined approach to underwriting might be a solution, such as has been suggested by my colleagues. The evolution of the Credit Union Service Organisations, CUSOs in the Republic of Ireland give cause for optimism in this area. Co-operative collaborations between credit unions, where specialist skills are required, such as in mortgage underwriting, have evolved and are evolving.
Another example of a collective approach is provided by the Cultivate initiative that involves credit unions in Ballinasloe, Gort, Tuam and Loughrea. The initiative offers farming loans, as referenced by my colleagues.
Some credit unions have advanced the opinion that SME lenders want more than just credit and seek current account, overdraft and other facilities that are now beginning to emerge in credit unions. Aside from the considerations that have been outlined already, it should be noted that credit unions have been excluded from State and European initiatives such as the European Progress Microfinance Facility, which is called progress microfinance and was launched in 2010. Credit unions did engage but were denied access to the scheme.
In conclusion, credit unions are engaged in relatively small scale commercial lending at present. If the considerable funds of credit unions are to be made more readily available for commercial borrowing purposes, lending to limited companies would have to be addressed, credit unions would have to evolve more sophisticated underwriting systems, which I believe they are up for, and possibly on a collaborative basis, and incentive and facilitation schemes hitherto restricted to banks would have to be extended to credit unions.
Mr. Seamus Boland:
I thank the committee for inviting Irish Rural Link and Sparkassen to address it on the cost of doing business in Ireland.
Irish Rural Link is a national network of rural community groups. It represents over 600 community groups and over 25,000 individuals who are committed to creating socially, environmentally and economically sustainable rural communities. As such we are well aware that SMEs and micro enterprises are the back bone of rural economies and a valuable employer. We can also attest to the fact that the impact of the recession is still being felt in many rural areas, which have not seen the same level of economic growth or employment as urban areas have enjoyed over the past couple of years.
Recently, we submitted a submission to the Department of Business, Enterprise and Innovation, which is attached to the documentation that we have supplied to the committee for today's meeting. In our submission we highlighted some areas that we have identified as contributing to the difficulties of business and thus the cost of doing business in rural Ireland. We are cognisant of the broader issues related to costs such as rates, planning permission, utilities and a lack of broadband and we are active in many of these areas.
Irish Rural Link has also focused on the area of access to finance. We have come to the realisation that Ireland should examine the feasibility of providing a regionally based public banking model. In that sense, we have invited the Sparkassen Foundation to work with us to design a model which is based on the hugely successful Sparkasse model of public banking in Germany.
As the committee may be aware, last year we actively participated in the investigation into this model that was jointly carried out by the Department of Finance and the Department of Rural and Community Development, a report on which is due to be published soon. We believe this model of regionally based banks will help to address the direct costs incurred by SMEs when doing business such as interest rates and other charges. Furthermore, we also see the reintroduction of a more customer focused relationship banking model that would reduce indirect costs for businesses. For example, the time and effort that many small businesses expend in their efforts to access finance.
I will hand over to my colleague, Mr. Harald Felzen, who will outline the Sparkasse model in greater detail.
Mr. Harald Felzen:
I thank the Chair and members of the committee for their invitation to attend.
As European project manager of the Sparkassen Foundation, I am very happy, together with Irish Rural Link, to outline how Sparkassen in Germany interacts with businesses, the range of services it provides to business clients and the distinctive elements of Sparkassen and commercial banks in Germany in comparison with Ireland.
Today, we will also discuss to what extent a common good oriented and local banking model could shift the dysfunctional Irish banking market, which would mean interest rates being between 2% and 3% higher than in the rest of Europe, towards a higher level of competition, and better services and prices for Irish customers.
Please let me emphasise that, based on our public service mission, a possible Irish Sparkassen model would not only have a banking role but a role to play in society. In accordance with this mission, the success of a Sparkassen model in Ireland must be measured by its local social, cultural and common good impact, which goes far beyond the basic expectation of sound business management.
To avoid repetition, I will not go into too much detail about the general Sparkassen principle and will highlight the core elements of the Sparkassen lending principles, as requested. Due to the time restriction I will focus on the salient points of our proposal that will contribute to the economic development of regions.
As one can see from looking at the chart shown on page 2 of my presentation, Sparkassen has a long-term commitment to the real economy and prevents credit crunches, which has proved particularly true in times of crisis. The graph shows that Sparkassen increased its volume of new loans to enterprise every year from 2009 to 2015, inclusive, thus enabling the German economy to recover quickly.
The chart on page 3 is an excellent example of the counter cyclical impact of Sparkassen on the indigenous German economy. The Sparkassen Finance Group has held a leading position in the German market for key business segments for many years. For instance, the group is further expanding and strengthening its position as the leading provider of finance to German SMEs. As many as three out of four enterprises in Germany are customers of the Sparkassen group. This important role in the German economy is particularly striking when one looks at the segment of loans extended to craftsmen and tradesmen, as shown on the chart.
Decisions on business loans and risk assessments are taken locally rather than at distant corporate headquarters. As their business area is limited to a clearly defined local territory, Sparkassen are encouraged to foster prosperity in that same region. Let me clarify this in an exemplary way. Normally, Sparkassen divide their business clients based on criteria such as turnover or liabilities. Other segments also exist such as farmers, doctors or special trained staff in Germany. The Sparkassen model represents a relationship-based banking model. Our advisers are the main point of contact for commercial and private banking needs. Our expert advisers provide professional support in both areas. As members can see on page 5 of my presentation, it states: "With the Sparkassen financing concepts, we systematically cover all levels of the financial hierarchy of needs." We discuss the ideas of our customers in depth and examine each of their needs separately because we want to offer them a wide range of customised conventional financing solutions that fulfil their needs.
Sparkassen in Germany accompany their corporate customers throughout the entire life cycle of their business and through the stages of set-up, growth, maturity, consolidation and succession. Unforeseen developments, if any, must be identified as early as possible in order to allow greater options to take action. The Sparkassen has a vital interest in keeping their business customers alive. One can see on the next graph that once a problem is identified Sparkassen can pursue various courses of action. Supporting our customers is always our first choice, which is quite evident because normally 50% of a company's staff are retail clients of Sparkassen with their mortgages, etc.
We have specially trained advisers, according to the Sparkassen Finance Group's concepts. We have the capacity to deliver even more intensive customer support. We also provide venture capital in the region because a person or group who wants to start a business can present a detailed plan to the Sparkassen. As a result of our commitment to the regional economy the Sparkassen are the real financers of venture capital projects in our region.
The Sparkassen lending activities feature certain principles that limit risks. Sometimes we are between the conflicting priorities of prudent loan policy and common good orientation. Holding as much as 75% of the market share is clear evidence of our commitment to small and medium-sized enterprises.
Working with the initial data, Sparkassen calculates customer interest over several stages, adjusting the risk accordingly. For example, it is 1% with regard to a business loan of €200,000 with maturity at five years and very good creditworthiness while good creditworthiness is about 1.5% and medium creditworthiness is about 2%. Our rating procedures are influenced by four factors that are weighted differently. They are quantitative factors, qualitative factors, warning signs and a joint liabilities scheme. What is important for the committee's understanding is that every loan decision is made by a bank adviser, not by a rating system. That is part of our relationship banking model. Very important in terms of reducing operational costs is the fact that ongoing workflow support by OSP-Kredit ensures that essentially all stages involved in a loan transaction are processed without any redundancy or media breaks.
To conclude, members of the committee can see that customer segmentation, graduated levels of support, decentralised business locations, our holistic approach and the risk-mitigating lending principles are some successful elements of the Sparkassen model. Distinctive elements relating to the Irish market are the focus on the regional economy, balancing growth with common good orientation, the added value for regional development, the fact that we are the pillar of the indigenous economy in Germany and the fact that the legal form of Sparkassen prevents privatisation, which is a crucial point in discussions about the Sparkassen model in this country. In fact, access to finance for SMEs in Germany would be inconceivable without Sparkassen. Sparkassen has been the most important source of finance for SMEs for many years.
Nevertheless, Sparkassen is fully exposed to market forces. It operates according to commercial principles and its survival depends on its intrinsic capacity to generate adequate profits to fund its business operations. However, in order to maintain consistent services for its clients, Sparkassen does not strive for short-term profit maximisation as this may produce high risks in the long term. Sparkassen is a local player with an in-depth knowledge of its customers based on its relationship-orientated, personalised advisory approach. Sparkassen shows a long-term commitment to the real economy preventing credit crunches. This is the reason we are deeply convinced that a Sparkassen model for Ireland could improve the banking landscape in terms of costs, services and, fundamentally, social responsibility. I extend an invitation to the committee to visit Germany to get an insight into the real Sparkassen world.
Mary Butler (Waterford, Fianna Fail)
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I thank Mr. Felzen for his kind invitation. We will now have a question and answer session. We will start with Senator Humphreys.
Kevin Humphreys (Labour)
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I did not realise I was the first one to indicate. I thank Mr. Felzen for his presentation. I apologise for the over-run earlier. I thank the credit union movement for the assistance it gave me when I was a Minister of State at the Department of Social Protection. Certainly a lot of initiatives we got off the ground would not have happened without the support of the credit union movement.
I will move to the euro and cent element of it. The banks appeared before the committee earlier. We spoke about loans to small and medium-sized businesses. We were looking at variable loan rates of 6.95% and fixed loan rates of 5.5%. They gave the German example, which involved a commercial bank with rates of between 2.5% to 2.8% for SMEs. Mr. Felzen has given examples of between 1% and 2%. I know the Sparkassen model differs from that of the commercial banks in Germany but can Mr. Felzen tell me whether there are any hidden costs relating to interest rates because we often need to compare like with like? Are there any fees relating to arrangement loans or charges for borrowing other than the interest rate percentages because it is always a comparison? When we talk about AIB and Bank of Ireland and compare interest rates on loans, they say there are many hidden costs relating to the European banks who charge arrangement loans and have hidden costs whereas Irish banks charge only interest rates on small loans.
Obviously, there are hidden charges on much higher loans. As a city-----
Mary Butler (Waterford, Fianna Fail)
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We will let Mr. Felzen answer directly because it would be easier.
Mr. Harald Felzen:
There are no hidden costs for the SME sector. There are very individual contracts which one must negotiate for business clients with a turnover of up to €1 million or €2 million but we have no hidden costs for SMEs. The interest rates should give an indication. It varies every day but it indicates where the differences lie between the Irish market and the German market.
Kevin Humphreys (Labour)
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There are significant differences between those figures. It was pointed out by Senator Reilly with regard to the affordability of borrowing. There is certainly a significant difference in affordability with regard to borrowing not just in rural Ireland but in urban Ireland. With regard to access to borrowing for SMEs, affordability is very important.
My next question is general. Only about 32% of the deposits held by the credit union of which I am a member are available for lending. The sister credit union on the north side has a similar figure. I think it has about €273 million in an investment portfolio but only about €186 million out on loan. This is because of restrictions. For the sustainability of the credit union movement, I believe there needs to be an expansion. Sparkassen does not intend to go directly into the market but to support the credit union movement behind the scenes. Could Mr. Felzen expand on how he sees that developing not just in a rural sense but also in an urban sense? The two major credit unions in Dublin would be comparable in size to the old Trustee Savings Bank. This is local, but is the credit union movement an area into which Sparkassen is thinking of moving?
Mary Butler (Waterford, Fianna Fail)
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Who would like to take that?
Mr. Ed Farrell:
Senator Humphreys outlined a loans-to-shares ratio of 32%. I suppose the average is that one third of the €16 billion in credit unions is loaned out while €10 billion or €11 billion is not loaned out but is largely put into investments. However, these are investments in a very narrow sense of the word. They are really bank deposit accounts and Government bonds so they are very low-risk investments, hence the desire across the credit union movement to increase the amount of loans and the type of loans whether they be loans for SMEs, about which we are largely talking today, or home loans. There are a number of new types of loans the credit union movement and individual credit unions would like to get involved in offering.
The last question concerned Sparkassen and how it intended complementing the credit union movement. In respect of there being more banks and local banks, all of the problems with Trustee Savings Bank were probably related to Dublin and Leinster. A similar situation occurred in Munster. Building societies were another factor. Unfortunately, all of those entities disappeared during the financial crisis.
Mary Butler (Waterford, Fianna Fail)
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Does Mr. Johnson wish to come in?
Mr. Kevin Johnson:
Senator Humphreys mentioned that only 32% of the deposits held by his credit union are available for lending. To be clear on that, all savings are available for lending. It is just that, unfortunately, only 27% is out on loans so there is significant capacity to lend more. As Mr. Farrell said, there is a huge appetite across credit unions to get more involved in broadening the offering, namely, building on the solid base of the personal consumer lending and prudently moving into home loans and more of the small business loans.
It was very interesting to hear Mr. Felzen's description of a Sparkasse. To be honest, if the name was removed, he could have been describing the credit union movement here in Ireland. He talked about having an economic role in preventing credit crunches as well as a social role. We should remember that throughout the domestic and global crisis we experienced, credit unions never stopped lending. Their doors were always open. We did not see the failure we witnessed in other parts of the financial services sector. As the committee members know, credit unions are at the heart of their communities, and there is definitely an appetite to do more. It is probably fair to say that only a small number currently have the expertise to immediately grow in this way. This is why we feel we could start to develop those skills collaboratively, and move further into that area.
Mr. Tim Molan:
To return to the figures, without any change in legislation, approximately 0.4% of credit union assets have been put into commercial lending. That equates to 1.3% of the current total loan book. Without any change, that can be increased to between 5% and 6%. That is more than a tenfold increase. We have to develop the skill sets, and as my two colleagues have mentioned, we have ideas and there is movement towards that area.
There are other areas we need to look at. All of the economy has not lifted at the same pace. We need to look at the area of microlending. That is pertinent to smaller industries and to credit unions' capacity to get into that area. There is a lot that can be done. I would ask the Government, the Department of Finance and our European partners to have more regard for credit unions where social lending schemes are concerned. A lot of good was done by the enterprise boards. We should consider the issue of the sustainability of new enterprises. If one looks at the top reasons for new enterprises to fail within their first five years, one sees that they run out of cash, they do not have the right team or they lack mentoring. My colleague from the Sparkassen foundation notes that it is about more than just money. A bit more imagination is needed, not only in arranging how the money is given out, but in ensuring that the relationship with the borrower becomes more meaningful as time goes on.
Mr. Harald Felzen:
Sparkassen and credit unions, which are called co-operative banks in Germany, are very similar in their ethics. The distinctive element is that a Sparkasse is a common good-oriented bank, which is committed to the wider public, to all the people in the council. Credit unions are member-oriented. That is point important to understanding the roles of the Sparkassen and the credit unions.
Kevin Humphreys (Labour)
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How much investment would be needed to create a central service provider? What kind of figures are involved?
Mr. Harald Felzen:
Approximately €5 million would be needed to set up a central service provider. For the first pilot Sparkasse, we need approximately €15 million to €20 million. We have a comprehensive approach for Ireland in our proposal to Government. This consists of eight to ten Sparkassen, and the initial cost is about €200 million.
Niall Collins (Limerick County, Fianna Fail)
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I would like to pick up the same point. What is Mr. Felzen's best hope for a timeline for such a scheme coming into operation in this country?
Niall Collins (Limerick County, Fianna Fail)
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How was the Sparkassen Foundation's engagement with Government been? Can the witnesses give us a general overview?
Mr. Seamus Boland:
We have been engaging with a range of actors across the whole social partnership, including all of the political parties, the Government, the Department of Finance and, of course, the Central Bank. We really have been talking to a lot of people. We are very pleased with that engagement so far. We know there is a decision pending. We believe there is a certain expectation for that decision to be positive.
We have always made this point. Historically, the Irish banking system featured the Agricultural Credit Corporation, ACC, and the Industrial Credit Company, ICC. There was always room for that kind of banking in Ireland, even before the crash. There is still room, because the current banking system is very homogenous. In other words, if an applicant is denied a loan in one of the main banks, they will more than likely be refused in another. In Germany during the recession, as the chart in the presentation clearly showed, when people received letters demanding payment they had the choice of going to Sparkassen. Sparkassen took on many customers as a result. Here, mortgage holders had no choice. In fact, the first letter they received was from the vulture capitalist who suddenly had control of their loans. We believe there is very good engagement. There is a positive view from the Government on this, but we await its decision.
Niall Collins (Limerick County, Fianna Fail)
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Can the witnesses from the credit unions provide a quantum of the money available for lending to businesses? Can they give an indication, similar to that given by Sparkassen, of the differential on the rates a credit union could charge for a typical €200,000 loan over five years? We know the rates that the main pillar banks are charging. What has to be done to unlock the money which could potentially be made available?
Mr. Kevin Johnson:
I will answer the query on the amount of money available. Under the relevant regulations, the limit is set at a maximum of 50% of the regulatory reserve ratio, which is 10% of assets. As such, the maximum amount available for lending is 5% of the total assets of the credit union movement, which is €16.8 billion. Interest rates are determined by each individual credit union. They depend on the nature of the loans and the risks inherent in them. At the moment, the nearest comparator is probably the product offering of the Cultivate scheme, which features a standard variable rate of 5.5%.
Mary Butler (Waterford, Fianna Fail)
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Before taking his questions, I would like to say that Senator Reilly was a strong advocate for the Sparkassen Foundation's appearance before the committee.
James Reilly (Fine Gael)
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After that introduction, I must welcome the witnesses warmly. I attended the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach to hear from Sparkassen. I also had the honour of addressing the Irish League of Credit Unions at their AGM a few years ago when I was a Minister. I am a great fan of both, and I will lay that on the table at the very outset.
I will address the credit unions first. Clearly, the witnesses see an opportunity here. I know they are frustrated to have €9 billion stuck in a low-return investment, and that they would much prefer to invest it in our communities where it can do social good. I have a couple of direct questions.
I have read the plan, which shows how it would be progressed. What do the credit unions see as the blockages and how do the representatives suggest that we as legislators address it? What needs to change in order for the credit union movement to achieve what it wants to achieve? Mr. Johnson spoke about the amount of funding available and 50% of lending that could be commercial, with 10% or 5% of assets of €16.5 billion. Perhaps he could give us the figure that he believes is still available to the credit unions under the current situation. If he was able to release the €9 billion, what it would mean for local economies?
On Mr. Felzen's comments, I wish to highlight that three quarters of enterprises in Germany are borrowing from an individual Sparkasse. I am very impressed that this banking system came about even though Germany has come through 100 years of all sorts of ups and downs. Ireland has had its troubles also, but in the overall scheme of things Germany has come through a lot more than we have in the last century.
What rate does the bank charge for overdrafts? We all realise how competitive the Sparkassen rates are for loans. They place in stark and poor contrast what the pillar banks are doing in Ireland currently by way of available rates.
My colleague asked about arrangement fees and Mr. Felzen said there were no such fees for SMEs for smaller loans. Will Mr. Felzen tell the committee what the cut-off point is for that? Is it €100,000, €200,000, €500,000 or €1 million before an arrangement fee might be charged to a prospective borrower?
I am very impressed by the fact that Sparkassen branches in a region only service, lend and reinvest in that region. This is really powerful.
I understand that Mr. Felzen had an excellent meeting this morning with Fingal County Council and Councillor Tom O'Leary. The possibility of branches opening in Fingal to service two constituencies, Dublin-Fingal and Dublin-West, was explored. Mr. Felzen also visited Blanchardstown. There are 800 farmers in the Fingal area and many successful food enterprises, such as Country Crest, Keelings, Keogh's Crisps and so on. The Sparkassen model would offer a huge opportunity for many of those who sometimes find the affordability of loans a challenge.
Mr. Felzen outlined how much it would cost to set up. For approximately €200 million, one could set up in the eight regions. Is it true to say this could result in a €2 billion financial injection into the local economies of the eight regions that are in scope? Will Mr. Felzen explain the key services that Sparkassen would provide? Reference was made to the central services provider and I presume the bank would have its own IT system also.
There was a lot of smoke and mirrors going on earlier. I wish to return to an issue to which I previous alluded, namely, the Central Bank's SME report and other reports that are to hand. The statistics are obvious. SME loan rejection rates in Ireland increased to 13.9% in the six months from March to September 2017. We have a problem even if others do not believe we do. The interest rates in Ireland for non-financial corporation loans are at 5%, which is higher than in comparative countries. We have already heard how the credit union would have to charge certain variable rates but I believe it is not inconsequential that these representatives are sitting beside each other as a group and that they are here together at the committee as a group. I am aware that while they have their separate agendas they are similar, but just with a different way of doing business. Perhaps there is room for exploration there. Notwithstanding this, I believe that if the answer is affirmative and that if Sparkassen - which has 100 years of experience in assessing loans - operated in Ireland, in two years there could be €2 billion extra in circulation for SMEs.
I especially like the fact that there is a lot of mentoring and supervision going on, and not in an intrusive way, so the bank can see the red flags if people are getting into trouble.
That was a lot of our problem during the financial crisis. We are not here to beat up our pillar banks by any means but there certainly was a commission-based performance culture. The more the banker lent, the more commission he or she got. I do not know that the same level of detailed supervision was in place that would be in place at Sparkassen banks or the credit unions. I would welcome that aspect.
Our local SMEs who are the driving force in Ireland's economy could really benefit by the presence of the Sparkassen model in this State. It would loosen up the arrangements without jeopardising financial stability for the credit unions. It would allow the credit unions to use money that has been gathered from the local community, which would be delighted to see reinvested in the community. When I was the Minister for Health this funding was on offer for building primary care centres. For one reason or another we had trouble with the Department of Finance and with Central Bank regulations and we were not able to avail of the funding. Mr. Seamus Boland referred to the ACC and the ICC banks years ago. Many businesses today would not be in business were it not for the presence of those two banks at that time. I know there will be problems, issues and difficulties, but I am hugely supportive of what both groups are trying to do. If they can see a symbiotic, cohesive and productive engagement between them it would be all to the better. The Government, however, is considering this report. I believe it may be in the Department of Rural and Community Development. I am not sure. We strongly look forward to the report coming out. I certainly lay my cards on the table when I say that I want to see a positive response to the report and for the opportunity to be grasped to give society and our own communities back a little bit of control over their own destiny. I thank the representatives for coming to the committee. I hope they will be able to answer the questions I put to them. I am sorry for speaking for so long but it is because I am very enthusiastic about the matter. I hope the witnesses have not lost track of my questions.
Mary Butler (Waterford, Fianna Fail)
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I thank the Senator. Did Mr. Felzen manage to pick up some of those questions, specifically about overdraft rates?
Mr. Harald Felzen:
In Germany there are more than 400 Sparkassen. They are independent so I could only give an indication of the range of overdraft interest rates. I am aware that it varies between 7.5% and 12%. It depends on the individual Sparkasse. The Senator asked about the arrangement fees. This is a special fee that is only reckoned when companies have turnover of €25 million to €30 million. This is a very individual approach. Arrangement fees are not reckoned in any SME loan business activities of a Sparkasse. Above €1 million and up to other sums there would be possible arrangement fees but not in the SME sector for business loans. We have a four-year business plan in the proposal to Government for the Sparkassen model in Ireland. For the midland region, for example, we reckon we could sum up the business loans to 2022 to around €230 million. It depends on the economic strengths of the region so it could be more or less. We believe that after five years we can estimate €1.52 billion in business loans with eight to ten Sparkassen in Ireland. These are the correct numbers we have reckoned in the business plan in our proposal for the Irish Sparkassen model.
The Senator asked about key services. The Sparkassen model has a comprehensive approach. This means the banks offer all the financial services of a bank. There are no services we do not offer. We do mortgages, SME loans, transaction banking etc.
James Reilly (Fine Gael)
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Do they deal in cash and coin?
Mary Butler (Waterford, Fianna Fail)
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I thank Mr. Felzen. I invite Deputy Neville.
Tom Neville (Limerick County, Fine Gael)
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I welcome the witnesses.
James Reilly (Fine Gael)
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Will the Chairman allow the other witnesses also to respond?
Mary Butler (Waterford, Fianna Fail)
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I apologise. Deputy Neville can come in after.
Mr. Ed Farrell:
In answer to the point on the State-backed investment fund for SME lending, we would need the Central Bank to alter the rules to allow collective investment vehicles, into which credit unions could pool funds to be lent onward to SMEs. It is within the remit of the Central Bank to do this. We would need Government support, specifically from the Department of Business, Enterprise and Innovation and the Strategic Banking Corporation of Ireland, both of which we met between 2015 and 2017. There was a lot of initial interest but it waned and there seemed to be different priorities, such as the agri-loans provided for in budget 2017 for the Strategic Banking Corporation of Ireland. Resources and expertise are needed for SME lending so pooling is required. Pooling would give us a better bang for our buck and make lending cheaper, as would be the case were risk assessment to be done centrally. Better decisions and cheaper finance would be good for SMEs.
Mr. Kevin Johnson:
Senator Reilly asked about the amount. If credit unions were to max out on the current permitted limits it would be approximately €800 million. It would be worth exploring how Sparkasse Bank can provide credit at between 1% and 2%. There are various costs in providing credit and all the funding in credit unions comes from savers. One of the main areas of focus for credit unions is to provide a return for hard-pressed savers, whom nobody else looks after at the moment, and it would be interesting to know how we could get a return for savers while meeting statutory levies and, at the same time, provide loans at between 1% and 2%.
Mr. Tim Molan:
The figures were quite interesting. My colleague said there were 286 credit unions left in the Republic of Ireland but there are well over 400 branches in communities so there is a ready-made infrastructure. They are the last financial institutions standing for many in our communities. We have been criticised for lending only 20% or 25% of what we could lend, but that is because we provide a savings a facility to members in all the communities to which I referred.
Tom Neville (Limerick County, Fine Gael)
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Mr. Felzen said the Sparkassen model was regional and that it can reinvest back into a region. Bigger countries have regions with large populations so there will be more commercial advantage in the model for such countries. What way does he propose to look at the regions of Ireland and how will he determine a region? A region of Dublin would be very different from a region in rural County Limerick. What are his proposals in this area?
What size of urban conurbation would he propose for a branch? Is there a town size below which he would not go? He talked about giving back socially.
Mary Butler (Waterford, Fianna Fail)
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We have a vote but Deputies Collins and Quinlivan each have a question.
Niall Collins (Limerick County, Fianna Fail)
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Witnesses will be aware that there is a question mark over the viability of the post office network. The solution we most often put forward is for it to increase its range of services to generate business. Has either organisation looked at a link-up with the post office network in furtherance of their projects?
Maurice Quinlivan (Limerick City, Sinn Fein)
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Mr. Molan has already answered my question. He said 1.3% of all credit union loans were commercial and that this figure could rise to 5% or 6%. Does he think that can be achieved? What can the credit unions do to achieve it?
Mr. Tim Molan:
Our first thing would be to help ourselves by building up our skill sets and this would involve greater co-operation among credit unions. There have been schemes, particularly in the area of microlending, but people were not interested in talking to credit unions about it. These areas could make a significant impact on communities. We would welcome more interest from the committee in this regard.
Maurice Quinlivan (Limerick City, Sinn Fein)
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A figure of €500 was mentioned. Was this one of the microloans to which Mr. Molan referred?
Niall Collins (Limerick County, Fianna Fail)
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That was a question from Deputy Neville. I asked about links with An Post.
Mr. Seamus Boland:
We have talked to the post office, both the union and An Post itself. We are not saying this is an easy option or a perfect cure for the post office network but we see synergies between the network and banking in particular regions. It would be a matter for the Government and if it decides to take it forward, we would want the Government to be a stakeholder. It would have to tweak a few things but there are opportunities. We are not saying it is a cure-all but it could go a long way.
James Reilly (Fine Gael)
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Can the witnesses answer Deputy Neville's question?
Mary Butler (Waterford, Fianna Fail)
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Deputy Neville had to leave because we have a vote.
James Reilly (Fine Gael)
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It was the question Mr. Felzen took first.
Mary Butler (Waterford, Fianna Fail)
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It was on size.
James Reilly (Fine Gael)
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That is just the population of Fingal.
Mary Butler (Waterford, Fianna Fail)
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I have a couple of questions and then I will invite Ms Dooley to speak. I compliment the three credit union organisations. My family has had a long association with credit unions. As members know, I am from Waterford. My dad is no longer with us but he was one of the founding members and chairman of the Portlaw Ballyduff credit union. Recently, we have seen a lot of amalgamations. For example, Portlaw Ballyduff amalgamated with St. Dominic's in Waterford and the amalgamation has been very successful. The transition has been extremely good. There were worries that there would be a negative impact on the smaller credit union but that has not been the case. In fact, there have been benefits especially in terms of being able to use an ATM card. I congratulate the credit union movement on surviving through very difficult times.
The credit union movement came before the Committee on Housing and Homelessness which sat in 2016. I was a member of the committee. The Government was not even formed then. We have huge issues in relation to housing and homelessness. At the time the credit union movement offered approximately €13 billion on deposit at the time and it was open to putting approximately €2 billion or €3 billion forward for the development of housing. The witnesses can correct me if my figures are wrong. I know nothing has happened but is there any update on the position?
I compliment Irish Rural Link on all the work it has done with the Sparkassen bank because there is no doubt it has been to the fore in regard to it. It is ploughing the way forward for the bank. Everything we have heard today is very complimentary about the bank and what the members are trying to achieve. Mr. Kinahan, whom I met last week, is present with Ms Dooley. There is significant development in the greater Dublin area and there is an appetite in the regions for credit unions, banking and funding for small and medium enterprises. It would be very welcome if we could make progress on both fronts. I am not sure whether it was Mr. Farrell who came before the housing committee.
Mr. Ed Farrell:
We launched a proposal we had at that time following on from the initial social housing strategy proposed by the then Minister, Deputy Alan Kelly, at the end of 2014. The Minister who succeeded him, Deputy Coveney, updated it in July 2016. Our proposal came on foot of those two requests from Government about credit unions and other private or non-typical funding sources being required for social housing. Following the launch of the proposal, we presented to the committee at the time. We outlined where we needed help from two arms of the State, one being the Central Bank, to change the rules on the investments credit unions could hold and then when the rules were changed we would need the Department of Housing, Planning and Local Government to push forward with the fund it had been talking about. We have made good progress on the rules laid down for credit unions by the Central Bank. They were opened to a public consultation last May and that closed in June. In the run-up to Christmas and early in the new year, we have been over and back to the Central Bank and it looks like it is going to relax the rules.
It is opening the door very little but it is progress and it will allow an initial project for a tranche of money from credit unions to be made available to approved housing bodies for the first time. It looks life half of it is starting and the other half is for the Government to push on and create the vehicle into which those approved housing bodies can borrow from the State fund, as it were, which was outlined in the reports by the previous Ministers, Deputy Kelly, and Deputy Coveney. We are actively engaged with the Departments of Finance and Housing, Planning and Local Government and the Irish Council for Social Housing, which is the apex body for the approved housing bodies, to try to complete that part of the equation in order to allow the investment of a modest amount of funding. It would act as a template or trial project. A lot has been done but there is just a little bit more to do to get the fund up and running.
Mary Butler (Waterford, Fianna Fail)
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Mr. Johnson referred earlier to the costs of running credit unions. Would credit unions be able to compete with the Sparkassen interest rates of 1% and 2%? In terms of credit unions expanding their portfolios to lend to SMEs, could they be competitive with interest rates if they got the go-ahead to do it?
Mr. Kevin Johnson:
I acknowledge the Chairman's kind words. They are very much appreciated. I am delighted that she had first-hand experience of seeing the benefit of some of the transfers of engagement. I am trying to understand how someone in our market could provide credit for 1% to 2%. It is not that we do not want to compete with it. We want to match it and beat it, if that is possible. It is fantastic what that could do. There definitely is an appetite for credit. Given that only €27 in every €100 of savings are out in a productive or prominent way, of course there is an appetite to do a lot more, in particular for small businesses. It is interesting that there are a lot of small businesses in Ireland today that would not be in existence were it not for the support of a credit union.
On housing, as my colleague said, the Central Bank has listed the publication of the investment regulations for Thursday, and we are looking forward to that. It is a step in the right direction but we believe there is much more we can do. Our preference is to see a legislative change that would allow credit unions to lend directly - individually and collectively - not just to the tier three housing bodies, but also to local authorities. We are appalled by the fact that essential workers, namely, gardaí, teachers and nurses, cannot afford to buy or rent houses. We have funds that could be productively used to develop schemes to address that. We ask the committee to consider that and we would be happy to provide assistance in terms of the legislative changes we request.
Ms Sinéad Dooley:
I thank the Chairman and committee for the invitation here today. It is heartening that the committee recognises the credit unions and Irish Rural Link, IRL, as being part of the overall discussion. I have watched other groups present to the committee as well. There is a common theme. As someone with 14 years' experience of being a public representative, two of the most common obstacles I have found that affect SMEs trying to get into and stay in business is, first, commercial rates, which is always a discussion ahead the budgetary process at the end of every year and, second, access to finance. It is not just access to finance. The key to it is access to competitively priced finance, which is what all of the committee's discussions have been about.
I hope today's discussion has been an eye-opener for elected members and Oireachtas Members because IRL, as anyone who knows us, does not just advocate on behalf of rural areas. What we endeavour to do on every issue is to come to the table with solutions. We are in a healed economy and we need to heal the banking system. We are not here to bring the problems. We all know what they are.
We are trying to bring about solutions as to how we can make finance more readily available and to try to start to rebuild sustainable economies. The one uncertainty at the moment is Brexit but the one certainty is an ability within the Irish people to build their own economies if they are given the tools to do so. That is our job, that is, to try to provide the tools across the board - finance being one of them - to allow people to do that. Arising from today's discussions, if one thing has been borne out for us in Irish Rural Link, IRL, in terms of why we got involved from day one, it is that we have been appealing to Members and Governments to set up the task force. There is a serious need for round table discussions with all stakeholders to the helm to see how we can all work together to try to bring about those solutions. There has never been a better time to do so. I was delighted with much of what Senator Reilly said but the one thing I have found frustrating is the number of reports that continually tell us that there is no obstacle to accessing finance and yet the number of loan rejections has gone through the roof. I was delighted that the Senator pointed that out because that for us has been the reality on the ground. In every seminar we have run, in every community we go into, they are the real life stories we hear, of people trying to increase their workforce and of trying to get involved in research and development but they cannot get access to finance.
I thank the committee again for this opportunity. We look forward to the report being published and working with all stakeholders to see how we can bring about positive change in communities.
Mary Butler (Waterford, Fianna Fail)
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Has anybody else a final comment to make?
James Reilly (Fine Gael)
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I thank the Chairman and the committee for inviting Sparkassen and the credit unions in and giving a strong message that this is not an either-or situation. We need our pillar banks, but their focus has very much moved away from face-to-face contact with the customer but the credit unions and Sparkassen have shown that their model of banking harks back more to the day of the face-to-face relationship and ease of doing business. I think we need both and I welcome the opportunity that Sparkassen has given us. I thank the people from Sparkassen for coming over, not once or twice but a number of times. I commend the credit unions on their persistence, because one needs persistence, but be under no illusion, many of us are hugely supportive of what they are doing. I also commend Irish Rural Link for opening the door and being the link with Sparkassen.
Mary Butler (Waterford, Fianna Fail)
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Is everyone happy? Mr. Molan, never let it be said that I excluded you.
Mary Butler (Waterford, Fianna Fail)
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I thank you all for coming here today to engage with the committee. I thank the committee members. We started at 3 p.m. so I thank them for their time. This is the final in a series of meetings the committee has held on this topic. It is intended to produce a report this year and we would like to invite everyone back on the day we launch the report, if they would like to attend. That concludes all the business on today's agenda.