Michael McGrath (Cork South Central, Fianna Fail)
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I thank the Office of the Ceann Comhairle for selecting this important matter for discussion. I have received apologies for his absence from the Minister for Finance, Deputy Noonan, who I understand is attending a Cabinet meeting.

This important debate is essentially about jobs and employment because 99% of businesses in Ireland are Irish-owned SMEs. Some 70% of private sector employment in this country is accounted for by SMEs. Some 700,000 to 800,000 people are working daily in Irish SMEs, so this concerns jobs.

The issue of SME debt has largely been overshadowed by household debt and mortgage arrears, but both issues are inextricably linked. If an SME gets into financial difficulty due to a debt overhang it can cost jobs. If a family loses a job it will have a direct knock-on effect on their ability to pay the mortgage and other households bills.

Last year, Ms Fiona Muldoon, a director of the Central Bank, said that about half of the approximately €50 billion owed by Irish SMEs was in some form of distress. The alarm bells should have started to ring at that stage. I welcome the recent intervention of UCD's Professor Morgan Kelly on this issue, given his strong reputation. He has triggered an important public policy debate in this regard and it is essential to give it the attention it deserves.

At a political level, we have been raising the issue of the debt overhang facing Irish businesses. Some weeks ago, I was informed in a Dáil reply by the Minister, Deputy Noonan, that last year the Central Bank set some targets for banks to move SME customers with debt issues onto longer-term solutions. Unfortunately, however, those targets have not been published by the Central Bank and we have had no indication of the nature of those solutions. The Minister said the banks reported that they have complied with the targets. This is the same Minister who, less than two years ago, told this House that one cannot believe what the banks are saying.

As in the case of the mortgage arrears targets, the banks' compliance with these targets in respect of SME debt restructuring needs to be independently audited and verified. It is essential for that to be done. In addition, the targets that were set last year by the Central Bank exclude foreign-owned banks, including Ulster Bank which is a major player in the Irish SME market. It is important to deal with that issue.

Fundamentally, SMEs with a significant debt overhang should have their viable trading business separated from the debt which is probably related to property. In recent years, we have seen many good, viable trading businesses being contaminated by the property collapse. Many of those property investments were not directly related to the business and did not relate to property which the business was using in its day to day affairs, yet represented a property investment. That contamination has directly affected many good, viable businesses. Therefore, we need to separate both aspects and put more innovative solutions in place. The solutions will certainly be more complex and quite different to those for mortgage arrears cases, for example. Many of the solutions for SMEs will involve equity participation and a fundamental balance-sheet restructuring for these businesses.

I look forward to what the Minister of State has to say. This is an important debate which is essentially about jobs and preserving employment.

Joe Costello (Dublin Central, Labour)
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I thank the Deputy for tabling this very important issue. It has recently been brought back into the public arena in a lively fashion by Professor Morgan Kelly.

The Government recognises that SMEs are the lifeblood of the economy and play a vital role in the continuing recovery of employment growth in our country. Government policy is focused on ensuring that all viable SMEs have access to an appropriate supply of credit from a diverse range of bank and non-bank sources. The Central Bank's statistics on SME lending provide a breakdown of outstanding debt across a number of different industries. Credit advanced to all non-financial, non-property related enterprises decreased by 2.1% over the quarter and by 5.3% over the year to end-Q4, bringing the stock of credit to €36.7 billion. An annual decline of 5.3% was also registered for end-Q4 2012.

SME credit to non-property, non-financial private-sector enterprises fell by 6.2% or €1.6 billion in the year to end-Q4 2013, to stand at €24.5 billion. This represents a decline of 3.1% or €771 million over the quarter, as these SMEs continued to repay more debt than was drawn down. SMEs accounted for 67% of all non-financial, non-property credit.

For a significant number of viable smaller and medium-sized enterprises the capacity to access financing is constrained by debt overhang, particularly in regard to property exposures. Restoring confidence and unlocking demand for the finance that is required to invest in growth, necessitates a coordinated and focused strategy for facilitating debt restructuring. Debt overhang and SME arrears are issues which impact on the ability of a SME to meet its existing commitments, as well as hindering its ability to secure additional credit which it may need. The Minister for Finance and his senior officials meet regularly with representatives of the banking sector about all aspects of the economy and this is a topic addressed in those meetings.

In June 2013, the Central Bank set quarterly institution-specific performance targets for covered banks to move distressed SME borrowers onto longer-term forbearance solutions. The targets set reflect the banks' capacity, processes and systems. The Central Bank has informed the Minister for Finance that the banks have reported that they have met their required targets to date. This perspective has been reaffirmed by both the IMF and the European Commission which report that the workout of SME arrears is progressing and that imposed targets are being met.

Irish banks are well advanced in restructuring their SME loan books. Bank of Ireland indicated in their recently published results that they had reached resolution in 90% of distressed SME cases. AIB's results indicate a resolution level of approximately 65%. It is also worth noting that defaulted loans for both banks have reduced year-on-year. Given the scale of the economic crisis that was inherited by this Government, this clearly represents considerable progress in such a vital sector of the economy.

The Central Bank's process of assessing financial institutions in their efforts to move distressed SME borrowers onto longer-term sustainable solutions is an important element in assisting SMEs to potentially transition from a distressed to a more sustainable state and will continue in 2014. Additionally, the Government's decision to fast-track legislation to allow small companies, as defined by the Companies Acts, to apply to the Circuit Court for examinership, the Irish Banking Federation's new protocol on multi-banked SME debt, and the ongoing work of the expanded Credit Review Office are all initiatives that will assist viable SMEs in addressing their debt situation. Furthermore, specific measures to promote access to finance amongst SMEs, including measures relating to debt restructuring, are a central feature of the Government's Action Plan for Jobs 2014. I should stress that the credit review process remains available to any SMEs whose credit has been reduced or withdrawn by AIB or Bank of Ireland, as well as when credit is refused by them. I would strongly advise any SME whose credit is reduced or withdrawn, to avail of the services of the Credit Review Office.

Resolving the issue of distressed SME debt in a mutually acceptable manner that affords benefits not only to parties involved in SMEs and banks but also to the wider society and economy, has been and remains a key priority for this Government.

Michael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister of State for his reply. However, the figures provided in his answer ignore the problem we are facing, which is the property-related debt that SMEs are carrying. The figure the Minister of State has provided for SME credit for non-property, non-financial private SMEs is put at €24.5 billion.

My understanding is that there is another €30 billion or so attached to these SMEs in respect of property related debt. That is the problem we face. Many of these SMEs have a viable and sustainable business model but they have to deal with the problem of the property related debt which is hanging over them. We are asking for the targets which have been set by the Central Bank almost one year ago to be published. We want to know the nature of the solutions being proposed. We want independent verification of the banks' compliance with those targets. We want the targets to be expanded to include non-Irish banks such as Ulster Bank. We know that many businesses are very fearful now because of the consequences of the downsizing of the banking sector, including commercial customers of the former IBRC, whose loans have been sold on at significant discount to foreign-owned funds. These customers are very concerned at the approach being taken by those funds in respect of their businesses and the capacity of their businesses to continue to be sustainable.

I am disappointed that the reply ignores a fundamental aspect of SME debt which is property related. The figures have only been provided for non-property related debt and that only tells about half the story. There is much more work to be done. We want to ensure that where businesses have a significant debt overhang, proper innovative solutions are being provided that will allow them to continue to trade in business by separating the debt related to property from the debt attached to the viable business.

Joe Costello (Dublin Central, Labour)
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The remarks by the UCD academic Morgan Kelly related to the stress testing by the ECB. The ECB comprehensive assessment will not deal with loan restructuring as such. It will determine whether the banks have sufficient provision against their loans and capital. Irish banks have undergone such an exercise prior to the troika exit. The stress testing on that occasion proved to be successful. This is the second in less than three years. It has led to a substantial increase in the loan provisions made at the end of the year and as such we do not anticipate any capital issues for the Irish banks as a result of the comprehensive assessment.

Professor Kelly presented a hypothetical situation that in the third stress testing the ECB could find the banks would be unable to respond satisfactorily and that there would be another major debt problem which would cause considerable difficulties for the SME sector. The rate of restructuring is 90% for the Bank of Ireland and 65% for AIB. The banks have met the targets set. There is no reason to believe that even though we are not in possession of the full figures, the property related debts are of such a nature that would cause the difficulties that were feared in that hypothetical situation where we did not pass the stress testing. The scenario as presented by Professor Morgan Kelly is hypothetical. The response of the banks in dealing with the problems has been shown to be successful by two stress tests.