Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I will take up to 15 minutes and he will take the balance.

I welcome the publication of the Strategic Banking Corporation of Ireland Bill. It is long overdue legislation, as a State enterprise bank was promised as far back as February 2011 in the programme for Government. However, it is somewhat ironic that, having waited three years for the Bill, we are being given little more than three hours to debate All Stages. I can only conclude that the announcement of the SBCI in May was dictated by the political calendar and not the economic needs of the country. At the time, we were being hit by a veritable barrage of announcements about grants and all sorts of goodies. Curiously, the flow of press releases seems to have dried up since polling day.

We know from the history of the local property legislation that, when a Bill is rushed through the House with limited time for scrutiny, there is a considerably heightened risk of error. It is regrettable that the much-vaunted pre-legislative scrutiny at committee is not taking place this time. It would have given us the opportunity to invite the various industry groups and representative bodies that will be the customers of the SBCI to test whether the legislation was fit for purpose.

While I welcome any initiative that may be of assistance to the credit-starved SME sector, the SBCI as planned is an inadequate response to the sector's crisis with regard to access to credit. In simple terms, this initiative can be described as all sizzle and no steak. Even though it is called the Strategic Banking Corporation of Ireland Bill, it will not actually have a banking licence. In fact, the legislation must contain a special provision to allow it to use the word "Banking" in its name - the Minister has confirmed this - when it is not actually a bank at all.

When the Government sat down to design a mechanism to increase the flow of credit, it had three options. It could have set up a full-service, State-backed bank along the lines of the Industrial Credit Corporation, ICC, which operated successfully in the economy for many years. Alternatively, the Government could have opted for a mechanism in which the existing banks referred customers to the SBCI, which then made the lending decision. The new entity could also have gone down the route of simply providing a line of credit to the banks, which would then make decisions on SME lending.

This is undoubtedly the weakest version and while I can understand some reluctance on the Government's part to set up a brand new bank given the range of banking assets the State already owns it is difficult to understand why it is leaving the credit decisions about SMEs entirely in the hands of those who have over the last five years starved the economy of the essential new lending that it requires.

We know from the manner in which banks have hoarded capital that it is likely that they will continue to take a very risk-averse approach to lending. This means that many firms with viable business propositions will continue to be denied the capital they need to invest and grow their business. Cheap funding from the Strategic Banking Corporation of Ireland may help the banks' profitability without improving credit flow in the economy.

I note the comments of Mark Fielding of ISME, someone who very much has his finger on the pulse on these matters, who said:

... the fear among credit squeezed SMEs is that the bailed-out banks will revert to form and divert these loan funds to "safer" large businesses. Our banks have 'form' in this area and previous European low-interest loans found their way to less risky larger businesses, making a killing for the banks, while starving SMEs of much needed finance.

We also know from the manner in which banks have reacted to ECB rate reductions that they will act in their own short-term interests. Rate cuts which were designed to stimulate the eurozone economy have not been passed to either personal or business customers. The banks have stated that their primary focus is on rebuilding their net interest margin. While some would say that is what banks are meant to do, given the enormous investment of capital that was put in to the banks and the chronic shortage of credit, their actions most certainly do not concur with the needs of the economy at this time.

The Governor of the Central Bank has acknowledged that, compared with virtually all other eurozone countries, SMEs in Ireland face even more acute difficulties in terms of access to, and pricing of, credit. In that context, I believe the key failure in this Bill is that it will not result in any change in the lending standards that are applied by banks. We are likely to continue to see the same very high rate of refusal that comes up regularly in ISME and Central Bank surveys.

I am not asking for a loosening of credit standards to start some form of new credit boom but merely to correct the problem that all of us as practising TDs encounter regularly in our constituency offices, namely, good businesses with the potential to expand and grow not being able to get a loan that they need. In fact, in many instances it is not even investment capital to expand that firms are looking for, it is short-term working capital to survive. A simple overdraft can be a life saver for many businesses. We are all well aware of the problems that firms face in getting paid, sometimes even the State is a slow payer. It is a crushing blow for a company to go out of business when short-term credit could have allowed it the breathing space to trade its way out of difficulties. As it stands, the banks are often only interested in lending to the most gilt-edged of customers. A new source of credit for the banks which reduces their costs of funds but does nothing to change the ultra risk-averse lending culture, which pertains at the pillar banks at present and beyond, will be good news only for the banks' shareholders. It will be nothing more than a drop in the ocean in terms of the real world economic impact.

What I am calling for is for the Government to go back to the drawing board and give consideration to one of the two options to which I alluded, namely, a full service State enterprise bank or some form of hybrid model whereby the bank does not seek to compete directly with the existing banks but potential clients are referred to it and it makes the ultimate credit decision. A properly constituted enterprise bank could be a permanent solution to the lending gap which clearly exists in Irish banking and would ensure lending was available to any business that can demonstrate its creditworthiness.

It is somewhat of a well worn cliché at this stage to state that SMEs are the lifeblood of the economy, representing 70% of all employment in the private sector. Their well-being is vital to economic recovery. The domestic SME sector is diverse in nature and employs workers with a much wider range of skills than the multinational sector. SMEs can range from a small welding business to a local supermarket employing 100 people. The jobs crisis cannot be solved by focusing on foreign direct investment alone and by supporting the SME sector we are ensuring job opportunities for those with traditional skills as well as people with technical qualifications. It is in all our interests that the sector is supported. The number one issues cited in every survey of small business owners is access to credit. This was a golden opportunity to put in place a mechanism which would support SMEs not just during the current economic crisis but one that would stand the test of time. Unfortunately, at this point I do not believe we have got the formula right.

As well as problems with access to credit, SMEs report bank fees and charges are rising and that trend is likely to continue. To the best of my knowledge, no institution has applied for a banking licence to the Central Bank since 2012. The existing banks are fixated with the upcoming stress tests and are unlikely to change course and begin lending to SMEs in the manner required at least in the short term. The arrival of a number of international lenders in the early 2000s brought greater competition between banks. While some product innovation, including 100% mortgages in the personal banking sector, could rightly be criticised, competition ensured customers were offered a wider range of banking services at a lower cost. As the banking market has contracted, the dominance of two pillar banks, Bank of Ireland and Allied Irish Banks, is returning to levels last seen in the 1980s. Lack of competition leads to higher fees and charges, lower interest rates on deposit, high borrowing costs and a lack of product choice. The SBCI is its current format is unlikely to change that stark reality for bank customers.

Efforts to encourage non-bank funding have been completely inadequate to date. High profile announcements around seed capital, loan guarantees and microfinance have not been matched by delivery of funding. It is imperative that the SBCI does not go the way of Microfinance Ireland and the credit guarantee scheme which have, after less than two years in existence, required major examination and overhaul. It would be far better to get the SBCI right from day one.

I have suggested in the past that the Government bring forward a White Paper on the banking sector. Five years since the onset of the crisis the Irish banking sector is still not fit for purpose. It is imperative that the Government has a strategy for competition and regulation and that it does not simply react to each development. What we are seeing is a piecemeal approach to the many problems in the banking sector, including dealing with legacy debt, ensuring competition in the sector and preventing a recurrence of the mistakes of the past.

I have no doubt that the SBCI will be staffed by very able and diligent people who will work tirelessly to fulfil the mandate given to them. However, my contention is that the architecture in which they will operate is not fit for purpose and needs to be looked at in a comprehensive overall manner. We believe that this is better than nothing, but it could be a far more productive and efficient use of resources if the Minister adopted the model we have advocated.

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