Richard Bruton (Dublin North Central, Fine Gael)

I move: "That the Bill be now read a Second Time."

I am pleased to introduce the Credit Guarantee Bill 2012 to the House. The Bill has been long awaited and a concern of many, particularly in the small business realm. The Minister of State with responsibility for small business, Deputy John Perry, has been a strong advocate of the need for such legislation and has in recent weeks been engaged in consultations with small businesses, together with the Department of Finance, to achieve a better understanding of where the boot is pinching with regard to access to credit.

This initiative which is an important element of our ability to respond to the challenges for indigenous business is one of a suite of measures we are seeking to introduce. As Deputies know, the programme for Government includes an initiative for micro-finance for very small start-ups. This initiative deals with loan guarantees for established small businesses which are being turned down for credit because of the risk aversion of banks. We have also introduced a number of initiatives such as the development capital fund for larger but indigenous companies which have the capacity to grow but cannot access funding because their balance sheets are not strong enough. We also have the innovation fund which, to be fair, was an initiative developed by the previous Government. This allows access for companies to fresh capital, particularly in respect of high-growth opportunities in the innovation sphere. This suite of policies, with the traditional supports provided by Enterprise Ireland, probably the largest provider of seed capital funding in any state in Europe, represents an important and needed response to the challenges businesses are facing in accessing credit. Most Deputies will have numerous examples of cases in which this has been a real constraint.

I draw the House's attention to the Credit Review Office, which was set up by the previous Government. It constitutes a very important service whereby people can have reviewed decisions by the banks to refuse credit. The service is offered after an internal appeal has been made. Given the level of discontent over access to credit, I am surprised by the relatively small number of cases appealed to the Credit Review Office. It serves as a very important window for the Government on what is happening in the banking area. It is interesting that Mr. John Trethowan, the credit reviewer, has overturned the decisions of banks in approximately half the cases in which he has made a final decision. His office is an important means of review for businesses. The more people who use it, the better our understanding. Its work complements the work of the Minister of State, Deputy Perry, and the new Secretary General in the Department of Finance on getting a better handle on this challenge.

I am delighted to present the Credit Guarantee Bill 2012 to the House. The Bill presents one of the key targeted actions in the Government's Action Plan for Jobs 2012 to address access to credit and support lending to SMEs, and it will prove to be a practical way of facilitating additional lending to SMEs. I do not refer to a grant or support for ailing businesses; the scheme is intended to address specific market failures that prevent banks lending to some commercially viable businesses by providing a 75% guarantee to banks against losses on qualifying loans to job-creating firms. The target beneficiaries are commercially viable SMEs, that is, those which display a repayment capacity for additional credit facilities but which cannot secure credit facilities under current conditions due to two market failures, namely, insufficient collateral or a lack of appreciation by the credit institutions of the expansionary business model.

Let me outline the background to the rationale for introducing a credit guarantee scheme for SMEs. In February this year, the Government launched a range of measures under the action plan for jobs to improve the competitiveness of the economy, to improve supports for job-creating businesses and to remove barriers to employment creation across the economy. Every Department and more than 35 agencies and offices of the State are engaged with actions to support jobs which will be delivered in this calendar year. The plan is an engine for change and will be reviewed and revitalised every year. It is the start of a programme of strategic interventions designed to aid economic recovery, and clearly shows this Government's determination to get our economy back on the right path to sustainable, exporting, innovative and enterprise-led growth and through that the creation of sustainable jobs. The introduction of the State-backed guarantee scheme this year is one of the commitments my Department and I made that will quickly deliver positive results for the vulnerable SME sector.

The Government has placed supports for the SME sector at the heart of its strategy for economic recovery because of the important role that SMEs play and in recognition of the challenging environment in which they have operated in recent years. SMEs play a critical role in economic life and form the majority of all businesses in the State. They are the creative and innovative backbone of the economy and the job creators of the future. It is imperative that Government policy help them to grow and prosper. The Government is absolutely focused on ensuring that entrepreneurs and all companies throughout the economy are supported in every way possible to develop their businesses, to increase exports and to maintain and create jobs. This strategy will revitalise and rebuild the economy and lighten the burden we have all been carrying in recent years as a result of a failed economic model. The Credit Guarantee Bill is one of the Government's initiatives to give substance to this focus and commitment.

By far the most talked about problem in recent times facing the Irish small business sector is the lack of availability of adequate credit facilities. Financing of the economy is critical to long-term economic success. While large businesses have various options open to them, including the capital markets, SMEs are heavily dependent on the banking system. Therefore, a crucial aspect of supporting growth and recovery is fostering a favourable business environment including a well-functioning financial system. Clearly, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans. While this problem is not unique to Irish SMEs, but rather a worldwide phenomenon, it is a problem which the Government feels requires to be redressed urgently; hence, the movement on this Bill.

The Government has been, and remains, particularly active in the context of addressing the issue of credit accessibility since it took office last year. The House will be aware that the Government secured a commitment from the main lenders, AIB and Bank of Ireland, that each would make available not less than €3.5 billion next year and €4 billion in 2013 for new or increased credit facilities to SMEs. The aim is to restore the lifeblood of the market economy, that is, the lending and borrowing that help fuel business investments, run factories, buy machinery and equipment, pay wages, etc. This remains a key task, and the establishment of this facility is another step in addressing market weakness in this area.

New initiatives must complement, rather than substitute for, the main banks' lending commitments and activities under the recapitalisation package and they must represent value for money from the taxpayer's perspective. I have endeavoured to ensure this guarantee scheme facilitates additional lending of up to €150 million each year that otherwise would not have been extended by the banks. This is to assist businesses directly while at the same time ensuring appropriate safeguards are in place to protect the taxpayer.

Despite all the efforts of the Government on getting credit moving, I must emphasise that it remains the responsibility of the banking system to provide credit to businesses. The Government is prepared to offer additional targeted supports by identifying and addressing specific credit gaps or market inefficiencies that are impediments to lending. We have identified two distinct characteristics of the Irish SME lending market, namely, lack of collateral and lack of comprehension of new markets or models by the banks which provide the rationale for a temporary partial credit guarantee scheme, as follows. There are commercially viable companies in the SME sector with growth potential that have experienced difficulties accessing credit as they do not have the security required for conventional collateral-based bank lending. There is also an issue that predates, but which has been exacerbated by, the banking crisis whereby new or expanding companies engaged in new sectors, new technologies and markets struggle to secure finance. This can be due to a lack of familiarity or understanding on the part of the banks of the new industry, new product or potential of new markets. These market failures in the provision of credit to viable businesses became particularly acute in Ireland during the period of the property bubble, during which time the Irish banks lost capacity to assess credit risk in real-economy companies that were unable to offer property-related collateral.

The guarantee scheme will encourage lending to commercially viable SMEs and reorient lending to the real economy. It will encourage banks to lend to commercially viable SMEs in new sectors, technologies and markets and in so doing place Irish firms on a more level footing with other international competitors that have access to similar schemes, thus making them more competitive and their jobs more sustainable and secure. The scheme will allow a business not only to acquire a loan it could not otherwise obtain but also to establish a favourable credit history with a lender so it may obtain future financing on its own. It will realign bank lending with enterprise policy and secure the economic benefits from additional lending through increasing export creation, sustaining jobs and facilitating investment in the real economy.

The net Exchequer cost for an annual portfolio of €150 million of guaranteed lending is approximately €6.38 million. However, this cost should be seen in the light of the benefits that will be generated by the additional lending attributable to the scheme. Economic gains arise in terms of improving the financing environment for SMEs, encouraging a banking system that is fit for purpose, increased GDP, improved competitiveness, higher innovation activity, jobs sustained and created, savings on welfare payments and increased direct and indirect tax payments.

The benefits forecasted to arise from this intervention in each year of operation, assuming €150 million in additional lending, include the creation of more than 1,000 jobs, more than €25 million of Exchequer benefits in tax revenue and welfare cost savings, and a 398% return on the State's investment, in other words, a benefit-cost ratio of 4:1.

Section 1 defines certain commonly used terms in the Bill. Section 2 provides for certain conditions that must be satisfied by participating lenders. The Minister will enter into an agreement with each lender and accredit the lender to participate. For lenders to participate, we will require detailed consideration of how a lender will use the scheme to support lending over and above that being achieved. To demonstrate an understanding of the additionality principle, lenders will be requested to provide examples of where the scheme could have been used in the past, that is, examples of viable lending applications that were declined specifically owing to the circumstances the scheme is intended to address.

Section 3 provides for specific eligibility criteria for qualifying enterprises. The guarantee scheme is targeted at micro, small and medium enterprises employing not more than 250 staff as defined by the European Commission.

Section 4 confers on the Minister power to enter into agreements with the banks to give them a guarantee for qualifying enterprises. The aggregate of loans permitted within the scheme shall not exceed €150 million in any one year, thereby capping the State's liability. Having considered a range of possible combinations of guarantee rate and portfolio default limit which, when applied to the guaranteed portfolio, will deliver the desired overall risk share, a guarantee rate of 75% and a portfolio default limit of 10% have been agreed by the Government, in other words, 75% can be lost on an individual loan but the limit across the portfolio held by the banks is 10%. This sets the overall portfolio claim limit at 7.5%. For a given portfolio of lending allocated to each bank, each loan in the portfolio will carry a 75% guarantee, but potential claims under the guarantee are capped by portfolio claim limit. Therefore, the default performance of a portfolio may, in fact, exceed the portfolio default limit. However, the extent to which the State will cover overall losses is capped at the default rate of 10%. Any losses in excess of this figure must be borne by the lender.

Section 5 provides for the Minister to make a credit guarantee scheme which may make provision for various terms and conditions such as conditions with which the participating lenders must comply, the purposes for which the loan may be given, reports and information given by lenders to the Minister, conditions with which SME borrowers shall comply and other matters. Section 6 requires the Minister to lay the scheme before both Houses of the Oireachtas as soon as may be after it is made.

Section 7 permits the Minister to appoint an operator via a commercial contract to administer the scheme, after consultation with the Minister for Finance and the Minister for Public Expenditure and Reform on the terms and conditions of the contract.

Section 8 provides for a premium to be charged to participating borrowers in respect of loans guaranteed under the scheme. The 2% premium will be paid directly by the borrower to the State. The costs of the scheme will be partially offset by the receipt of premiums paid by borrowers.

Section 9 confers on the Minister power to withdraw a guarantee if a lender fails or refuses to comply with the terms of the scheme. It also provides for protection for the SME borrower in the event that a guarantee is withdrawn from a lender, in that a lender cannot impose less favourable terms on the borrower, upon withdrawal of a guarantee.

Section 10 provides for review of the guarantee scheme at any time. I have committed to review the scheme after 12 months of operation. The Minister must also submit a report on the review to both Houses of the Oireachtas not later than two months after the review has been completed.

Section 11 provides that costs associated with administering the scheme will be subject to sanction by the Minister for Finance, with the consent of the Minister for Public Expenditure and Reform, and met from moneys provided by the Oireachtas. Section 12 provides for the Short Title, the Credit Guarantee Act 2012, and commencement.

I emphasise that facilitating small business financing is not particularly simple or straightforward. Notably, the term "SME" encompasses a heterogeneous mix of enterprises and each SME faces a unique combination of local economic conditions and complex relationships with customers, suppliers and creditors. Hence, I am not advocating a one-size-fits-all solution. The scheme is designed to support commercially viable small businesses which are on the margins of SME commercial lending decisions. We envisage the initiative will involve approximately 2% to 4% of total lending to SMEs. The initiative is a small step towards a more sophisticated and accessible financing environment for small and medium enterprise in Ireland. It is only one component in the suite of initiatives aimed at ensuring a flow of credit.

Backing enterprise by providing State guarantees for those who struggle to obtain credit from lenders meets a vital need. These are the types of Government interventions that give confidence and encourage small business owners and consumers to expand their business, invest in new plant and machinery, conduct marketing campaigns, be innovative, recruit new employees and get their businesses and the economy growing. Therefore, the initiative will add value to the measures already taken to address the SME credit supply issue and represent value for money for the State.

I thank the officials who worked hard to put this legislation together and the many who advised us in the development of the scheme. This is new for the Government. It was considered by previous Governments which decided not to adopt it.

In talking about extending credit guarantees to take on some businesses risks, many will probably be sick of extending guarantees to financial institutions. That is why this legislation has been carefully designed. I am sure some will say it should be more ambitious and be on a bigger scale, but we are using taxpayers' money to underwrite the risk. We must target businesses which clearly are viable in areas in which there is a genuine market failure and the banks are not stepping up to the mark. We are not in the business of substituting in respect of the risk banks should take. Banks need to learn that the future lies in funding small and export-oriented businesses which are the backbone of the economy. In some cases, they must re-learn their trade. We are willing to intervene in a targeted way, which is what the scheme involves, as in the case of other interventions I mentioned. We are in a challenging period and the Government must take new initiatives. That is why we are taking on this scheme.

I commend the Bill to the House. I am interested to hear how we can develop not only this scheme but others to support access to credit for business and get more sustainable employment creating enterprises off the ground.

See this speech in context