Ray Butler (Meath West, Fine Gael)
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I have previously spoken on the matter of high loan refusal rates and the detrimental effects they were having on the recovery of SMEs which is vital for the country. At the time, it was suggested that banks were putting already pressurised businesses into further decline by withdrawing their overdraft facilities and restructuring these loans into term loans. Banks, on the other hand, were stating that their means of restructuring loans were in fact helping SMEs to continue to operate but yet again, the opposite seems to be the case.

A fuller and far bleaker picture has emerged in the latest numbers presented by the Central Bank. These figures exclude lending for property or to financial firms and are accepted as being a good measure of access to business credit. According to the Central Bank, lending to small businesses dropped by more than €500 million in the second quarter of this year, which is very disappointing. This latest decline represents a fall in lending of €1.9 billion to small and medium-sized enterprises in the 12 months up to the end of June 2012 compared with the same period last year. The financial squeeze applied now has tightened so much that total lending to SMEs now stands at just under €40 billion, with just €459 million of that figure accounting for new loans made in the three months to the end of June.

Furthermore, the independent organisation working in support of the Irish small and medium-sized enterprise sector, ISME, had already indicated that half of all applications for business loans were being turned down by the banks, prior to the release of the figures from the Central Bank. The picture becomes even bleaker. We already know that a high percentage of SMEs have restructured loans on their books with little or no access to loan or overdraft facilities from the banks.

All of this evidence puts a major question mark over the targets set for the AIB and Bank of Ireland to provide €3.5 billion each in new loans to small business this year. Clearly these targets are not being met on the ground. Once again it begs the question, if banks do not lend to small business and offer real support in these economically turbulent times, how can we seriously expect our economy to recover and grow?

For example, the recent report by the Credit Review Office states it has overturned 96 cases in respect of which banks refused credit. According to that office, which reviews lending by Allied Irish Banks and Bank of Ireland to small and medium businesses, 813 full-time jobs and 46 part-time jobs have been secured and an additional €9.6 million has been loaned by the banks. The report also states it will be a challenge for the two pillar banks to reach their lending targets of €3.5 billion each to small and medium firms in 2012. The Credit Review Office report also states that a significant amount of the lending is a restructuring of existing loans rather than new lending. Some of these loans were originally provided by Anglo Irish Bank and Bank of Scotland Ireland, both of which are winding down. Mr. Trethowan has expressed grave concerns about the length of time taken by the banks to process loans and instances banks declining potentially viable loans, with the effect of devastating the owner of a firm or farm.

While current Government initiatives are helping to address some of the problems faced by small business, if the pillar banks continue to minimise credit which SMEs need to remain viable, this sector will diminish to an unprecedented level. The banks must start lending to encourage growth in our economy. Without it, SMEs cannot and will not survive.

Seán Sherlock (Cork East, Labour)
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I thank Deputy Butler for raising this issue. As a Government, we have moved decisively to restructure the banking system and ensure that it provides credit to the economy every year. We are also acting to fill gaps where specific market failures exist.

The Deputy will be aware that the Department has introduced two targeted initiatives to support an additional flow of credit for small businesses into the economy. I attended the launch of the credit guarantee scheme this morning, which was presided over by the Taoiseach, Tánaiste and Minister for Jobs, Enterprise and Innovation, Deputy Bruton. The guarantee scheme will go live next Wednesday, 24 October, and is expected to provide an additional €150 million per annum in lending for small businesses over the next three years. Ulster Bank, AIB and Bank of Ireland are participating in the scheme.

The guarantee scheme is intended to address market failure affecting commercially viable micro, small and medium-sized businesses in two specific situations, namely, where businesses have insufficient collateral and where businesses operate in sectors with which the banks are not familiar. It provides a 75% State guarantee to banks against losses on qualifying loans to firms with growth and job creation potential. Each €150 million of additional lending under the scheme is expected to benefit over 1,800 businesses and create over 1,300 jobs.

Another important initiative developed by the Department is the €90 million microfinance loan fund to address access to credit and support lending to the most vulnerable cohort of our SME sector, namely, microenterprises. Microfinance Ireland was launched on 27 September and has been open for business since 1 October. It will provide loans primarily to newly established and growing microenterprises across all industry sectors, with commercially viable proposals that do not meet the conventional risk criteria applied by banks. Loans will be for amounts of less than €25,000 and will be generally provided for business start-up costs, expansion costs and working capital. The thrust of the lending policy will always be focused strongly on the potential sustainability of the business, its ability to repay the loan and the creation and maintenance of jobs. It is intended that the fund will provide loans to some 5,500 microenterprises over time, resulting in the creation of approximately 8,000 jobs at a cost of approximately €2,500 per job, which is extremely good value for the State's investment, when referenced against foreign direct investment.

To assist medium-sized business, we introduced the €150 million development capital fund scheme earlier this year. This will assist in increasing the availability of risk capital and closing the so-called equity gap experienced by SMEs seeking risk capital in excess of €2 million. The development capital scheme is aimed at addressing a funding gap for mid-sized, high-growth, Irish businesses with significant prospects for growth and job creation. Typical companies expected to benefit are those with in the region of 60-160 employees.

Further work with the banks is continuing to adapt to the needs of the non-traditional sectors, such as the technology and emerging sectors. Enterprise Ireland is working closely with the banks to develop propositions for exporters and technology companies that are suited to different stages of growth, including start-ups, early stage and mature companies and to adopt cash flow lending as opposed to the asset backed approach that has been the norm in recent years. Knowledge sharing is ongoing, including reciprocal secondments from Enterprise Ireland directly into the banks, sector briefings and trade mission involvement. In addition, the Department is working closely with the Department of Finance and the Credit Review Office to evaluate evidence on credit availability and to ensure that the amount of credit flowing to the SME sector is maximised to facilitate sustainable job creation and retention.

I refer the Deputy to pages 68 and 69 of the third progress report, which speaks further to the issue raised by him.

Ray Butler (Meath West, Fine Gael)
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I thank the Minister of State for his response. I welcome what is being done by Government, including the roll-out of the new credit guarantee scheme today and the introduction of the microfinance loan fund. However, Ms Fiona Muldoon, director of credit institutions and insurance supervision at the Central Bank, said that she believes a culture of leadership is missing in Irish banks. The secretary general of the Department of Finance also said that banks, in terms of lending decisions, are looking for miracles to happen and are closing shop, waiting for the Central Bank or Government to bail them out or for a national recovery.

I am visited every day at my constituency office by people operating small and medium-sized businesses who have obtained a structuring of their loans by the banks and are repaying these loans. However, because they are outside the original terms of their overdraft or loans, this is viewed as a mark against them in terms of getting further loans. The Irish Credit Bureau dealt with only a minuscule 760 cases because the banks will not even give out application forms for credit. If one cannot get an application form, one cannot be refused. Many of the banks will not even answer telephone queries from small and medium-sized businesses.

I was recently visited by a gentleman from Navan who employs nine people in his factory. Despite that he is paying his way, has restructured all of his loans, has €200,000 on his books and could employ ten extra people tomorrow, he cannot obtain finance. The Irish Credit Bureau served its purpose during the Celtic era. However, it serves no purpose now. It is not fit for purpose in a recession.

Seán Sherlock (Cork East, Labour)
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It is hard not to agree with the points made by the Deputy in relation the banking sector. A distinction must be made between businesses seeking to restructure loans in order to survive and retain their viability and loans generated for new business. I refer the Deputy to the Action Plan for Jobs 2012 and the third progress report which states that the Department of Finance published the SME lending demand survey in July. That survey of 1,505 companies shows that during the six month period surveyed demand for credit remained low, with only 38% of SMEs requesting bank credit between October 2011 to March 2012. The full survey and findings are available on the Department of Finance website.

I take on board the points made by the Deputy in relation to the person referenced specifically by him. I believe the Taoiseach addressed that point today during Leaders' Questions. This is about driving new relationships between Enterprise Ireland and the pillar banks.

The Economic Management Council has already indicated it will meet the pillar banks before the end of the year. There is no question that there is a sense the banks are not coming forward with proposals based on a lateral view of how to solve the problems of the person referenced by the Deputy who may have a viable business. The Government is trying to press home this point to the banks. There is a role for the Economic Management Council. The two initiatives, on micro-enterprises and the partial loan credit guarantee scheme, will create a new pillar of lending and will be government backed. This will have a knock-on effect on the SME sector of the economy.