Dáil debates

Thursday, 5 November 2015

Credit Guarantee (Amendment) Bill 2015: Second Stage

 

3:45 pm

Photo of Gerald NashGerald Nash (Louth, Labour)
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I move: "That the Bill be now read a Second Time."

Finance is the lifeblood of every business, a fact acknowledged in the programme for Government and in the actions this Government has taken since assuming office in March 2011. Enterprise needs finance for working capital and to feed investment, expansion, growth and jobs. In spite of recent progress, finance for business remains high on the agenda of Irish SMEs in the context of national competitiveness. It is for this reason that we are revisiting the issue of credit guarantees to ensure that Irish firms have the full suite of supports necessary to compete and succeed and to operate on a level playing field vis-à-visinternational competitors.

On 15 October 2015, the OECD's centre for entrepreneurship, SMEs and local development published a report entitled Financing SMEs and Entrepreneurs 2016, which benchmarked access to finance across the period 2007-14 in 37 countries, 18 of which were from the EU. As regards Ireland, the OECD reviewed many of the market conditions as well as the range of Government policy and other responses to the crisis for SMEs, including,inter alia,the introduction in 2012 of our credit guarantee scheme. The OECD study confirms that access to finance for small, medium and micro enterprises remains high on the political and business agendas in many countries in the context of the recession and the difficult economic conditions of much of the past decade. It lists as one of its key findings the fact that loan guarantees continue to rank first among policy instruments used by governments to facilitate access to finance for SMEs.

The role of financial instruments is growing globally and the European Union has a particular interest in ensuring that guarantees are used to leverage as much as possible in private sector co-investment to optimise the return on the taxpayers' euro. The trend is growing and will continue to do so for the foreseeable future. That is why we are focusing on credit guarantees here today. I will come back to this OECD study presently, but having set some international context, I will turn to the content of the legislation in greater detail, including the background of how we got here and the intentions of the revisions proposed.

As I mentioned at the outset, upon taking office in March 2011, the Government faced a major crisis in the economy, not least in respect of access to finance for SMEs, the section of the economy accounting for 68% of employment in the country, and this at a time when increased employment was the highest priority. No significant action had previously been taken to address this major area of concern to business and, accordingly, the 2011 programme for Government committed to the implementation of a credit guarantee scheme for banks against losses on qualifying loans to job-creating small firms. The scheme was designed to get banks back lending again to viable businesses in cases where there was either a lack of collateral or where banks lacked or had no understanding of the operation of novel SMEs, their business models or their markets.

In April 2011, the Government took note of initial work by the Minister, Deputy Bruton, on this issue, indicating that there were also serious issues of competitive disadvantage for Irish firms in this area because credit guarantee schemes of one form or other were in place in dozens of other countries to address situations of market failure. The Government tasked the Minister, in conjunction with the Ministers for Finance and Public Expenditure and Reform, to continue to move towards Irish legislation in this area.

In November 2011, the Minister received Government approval for the urgent drafting of a Bill to give effect to the work undertaken and for the appointment of an operator for the day-to-day operation and management of any future scheme or schemes made under the legislation. In July 2012, after passing all stages in both Houses of the Oireachtas, the Credit Guarantee Act 2012 was enacted. With the Act in place, the Minister's focus then switched to the drawing up of the scheme made under its provisions and an order was subsequently made giving effect to the credit guarantee scheme 2012. Finally, after conducting a public tender under the relevant public procurement, the Minister appointed an operator and the scheme went live on 17 October 2012. In short, the 2012 Act and the 2012 scheme were designed in double quick time to facilitate additional lending to small business for three years, from 2012 to 2015.

As regards the operation of the scheme to date, the Minister, the Department and I have maintained very close contact with the operator, receiving detailed weekly, monthly, quarterly and annual reports. Some of these details have been published on the Department's website on a quarterly basis. I recently asked the operator for up to date figures to present to the House today, which I would summarise as follows: sanctioned lending overall stands at approximately €30 million; the average loan sanctioned stands at approximately €157,000; and the employment impact is estimated to be 1,120 new jobs created and 643 existing jobs maintained. The regional distribution vis-à-vissanctioned loans is as follows: the east of the country, which includes Dublin, Kildare, Meath and Wicklow, 56.52%; the mid west, Limerick, Clare and north Tipperary, 11.84%; the south east, 10.88%; the south west, 7.85%; the midlands, 6.67%; the west, Galway and Mayo, 4.61%; the north east, Cavan, Louth and Monaghan, 1.43%; and the north west, Donegal, Sligo and Leitrim, 0.2%.

An integral part of the 2012 Act was a Government commitment to review its operation to ensure that it was fit for purpose and was meeting the needs of business. Section 10 of the Act provided that "the Minister may, at any time, conduct a review of any Scheme made thereunder". In mid-2013, the Minister, noting the fact that loans sanctioned were running at less than expected despite a relatively high estimated level of positive jobs impact and with no loans defaulting at the time, commissioned a full external review of the operation of the 2012 Act and the 2012 scheme. The consultants engaged via competitive tendering to carry out the review were First Choice Financial Services and AJS Financial. Their report was laid before the Houses here in July 2014 and the contents were reported to the Joint Committee on Jobs, Enterprise and Innovation in the autumn of that year.

In short, the review concluded that while the scheme had real merit, its complexity, the narrow range of products covered and the apparent disproportionate skewing of risk distribution in favour of the State as guarantor made it unattractive for the banks to operate. The review accordingly proposed changes in respect of the simplification of scheme procedures, the term of the guarantee, the spread of risk sharing and the product range.

On 3 February 2015, as an interim measure and addressing a range of concerns brought to my attention at short notice, I, with the consent of the Minister for Public Expenditure and Reform and the Minister for Finance, made an order giving effect to a second scheme under the 2012 Act, namely the Credit Guarantee Scheme 2015, SI No. 48 of 2015. This made two revisions to the existing 2012 scheme, namely providing for the refinancing of some loans where an SME's bank is exiting the Irish SME credit market and extending the maximum length of the guarantee from three to seven years. However, these revisions notwithstanding, it was clear that more significant change requiring primary legislation would be needed to ensure that the Irish credit guarantee system fitted the needs of business, enabling Irish firms to possess the full suite of supports necessary to compete and grow internationally.

The Minister brought the contents of the review referred to earlier to the attention of Government on 17 June 2014 and got approval to draft a Bill to amend the 2012 Act and by extension the associated schemes to enhance uptake, facilitate the growth of SMEs and support job creation. At that meeting, the Minister was also requested to work with colleagues to seek an appropriate role for the newly established Strategic Banking Corporation of Ireland, SBCI, in the operation of the credit guarantee scheme. Work on the latter was initiated immediately by officials of the Department of Jobs, Enterprise and Innovation and the Department of Finance.

At its meeting on 22 July 2015, the Government approved the text of the Bill, its presentation to the Dáil, and its circulation to Deputies. The Bill was subsequently published on 16 September 2015 and a detailed regulatory impact assessment, RIA, thereof was posted on the Department's website the following day. In short, the RIA stated that the Bill was being pursued to achieve the objectives of both the Oireachtas and Government in terms of providing additional credit for SMEs and job creation.

Broadly speaking, the provisions are designed to amend the 2012 Act and 2012 and 2015 schemes as follows: to broaden the definition of lender to cover additional financial product providers such as lessors, factors, invoice discounters and other non-bank financiers; to change the definition of loan agreements to include non-credit products such as invoice finance and leasing and to include overdrafts; to rebalance the risk between the State and finance providers; and to charge an appropriate premium for the guarantee.

More specifically, section 1 is a definitions section. Section 2 amends section 1 of the 2012 Act by defining new key concepts such as finance agreements and finance providers and related matters. Section 3 substitutes a new section 2 of the 2012 Act, providing for certification and approval of finance providers as participating finance providers. Section 4 substitutes a new section 4 of the 2012 Act, allowing the Minister to share risk with said participating finance providers, subject to constraints i.e. caps and limits. Section 5 amends section 5 of the 2012 Act, to broaden the scope of any future scheme or schemes under the legislation to cover non-bank finance providers. Section 6 amends section 8 of the 2012 Act to allow the Minister to charge a premium on all of the products covered by the legislation. Section 7 amends section 9 of the 2012 Act in respect of the withdrawal of the guarantee; and section 8 of the Bill deals with transitional provisions.

When approving the drafting and publication of the Bill, the Government also agreed to a proposal by the Minister for Finance that the Departments of Jobs, Enterprise and Innovation and Finance would work together on any additional necessary amendments to the Bill in respect of a role for the SBCI in this area. In view of this, I can now inform the House that it is intended to table, on Committee Stage, technical amendments to provide for a new section proposing to set out in law the detailed criteria under which the Minister shall calculate premiums, primarily that they shall not exceed the level needed to defray, or partially defray, the costs of the scheme; and clarifications to ensure that finance providers meet applicable legal requirements in respect of their conduct of their business under the legislation.

In addition, there will be important changes in a new and separate Part of the Bill under the following two headings: the provision for State promotional financial institutions that will, in the future, work with the Minister through this legislation to enhance the provision of credit to SMEs; and a role for the Minister to be able to give counter-guarantees intended to enable promotional financial institutions to unlock matching guarantee facilities from EU sources and share the risk across banks, promotional finance providers, for example the SBCI, the Minister, and a number of potential EU sources. In respect of the latter, it is envisaged that this counter-guarantee would operate in conjunction with the leveraging of related EU financial instruments in this area, such as the European programme for competitiveness of SMEs, COSME; Horizon 2020 funding earmarked for SMEs; and the European fund for strategic investment, EFSI, administered by the European Investment Bank and European Investment Fund, better known as the Juncker plan. This will allow Ireland to optimise its return from such major EU initiatives. My Department is continuing to work with the Attorney General's office on these points, and I propose to circulate revised text to the Oireachtas in the very near future.

I referred at the outset to the overarching economic need to ensure that Irish firms have the full suite of financial and other supports available to compete internationally. The October 2015 OECD study covering 37 countries, which I mentioned earlier, traces the heavy toll of recession and financial and debt crises on economies in the second half of the last decade. It goes on to state that these crises clearly illustrated the dangers of a financial system in which SMEs overwhelmingly rely on bank lending for their financing needs. It found that, notwithstanding the acknowledgement by governments of the continuing central role of the banking system, the vast majority of them also continue to support access to bank financing by SMEs. In fact, 33 of the 37 countries, including Ireland, provide loan guarantees.

This is the ground we have covered in the Bill, not just in strengthening and improving the guarantees as regards the risk spread, but also in the extension to non-traditional, or non-bank, sources of finance. The OECD found that the use of alternative financial instruments continues to grow, and that government policies to promote alternative sources of finance for SMEs proliferated in other countries in 2014 and 2015. Our actions here today continue to reflect that trend. The review, the Bill and the further amendments to come have been in the works for some time. It is clear from the OECD report that the approach of the Irish Government is in line with best and current international practice, and it is for this reason that I wish to move the Second Stage debate of the Bill.

To summarise, the work of the current Government in this area has been important to SMEs, and over 1,700 jobs have benefitted from the existing scheme. Our external review, undertaken early and in response to market demand, pointed clearly to the economic need for action, and we set about taking it. Significant legislative change was needed, and the Government gave its approval to legislate for such change. The technical nature of the legislation requires close working co-operation between Ministers, the Attorney General and officials to get this right, which was undertaken in line with best practice. The Bill and the Committee Stage amendments I have outlined, in particular those facilitating the leveraging of EU funding, will have significant benefits for employees, job creation and maintenance, for SMEs and the economy at large. For all of those reasons, I commend the Bill to the House

3:55 pm

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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At long last the Bill has finally arrived. Deputy Tóibín and I have been identifying problems with the credit guarantee scheme since early 2013. The Minister committed to a review, which he completed in 2013. It is not good enough that it took so long although the fault is not with the Department. This was a scheme that had potential to be hugely important and beneficial. It has taken so long to deal with the difficulties that were identified early on in its lifetime that many people will not get the opportunity to avail of it. I will come to some of those difficulties later and on Committee Stage.

The measures outlined in the Bill must result in the scheme improving lending to SMEs. It was identified in the OECD report on competitiveness that we have fallen since last year in terms of access to finance by SMEs. Within the last 24 hours, Bank of Ireland announced its decision to restrict cash dealings. That does not just affect older people and rural communities but also many SMEs, particularly those in the service sector which have already been hit with serious lodgement charges. They have been told on what days they can and cannot lodge coin, and now they are being told they can only lodge over €3,000. That means a lot of businesses are going to be keeping cash on their premises. This is not good enough and it shows the need for something radically different in respect of SME finance. The Bill goes some way towards achieving that but we have a long way to go. The Minister of State's party made a commitment in its manifesto and there is a Government commitment to a new business bank. What we have is a strategic banking corporation which is more of an agent or wholesaler using the existing banks. It has not made the difference or put the cat among the pigeons in terms of challenging the existing bank network to address SMEs and come up with new products.

The first problem with the credit guarantee scheme, which was identified at its inception, is the cost of the scheme and the premium on it. It is high-risk lending and a high-risk product, but the cost is too prohibitive for many businesses. This has not been addressed. The scheme was launched in October 2012 amidst the usual spin that comes with everything this Government does. It was supposed to provide €450 million over three years, which was the aim and expectation created. We now see that it has only just managed €1 million a month, so to get to the €450 million we would need another 35 years. The Minister of State, myself and everybody else in this Chamber will be well gone out of it in 35 years. The scheme needs radical surgery. The Bill goes some way towards doing that, which is why we will support it on Second Stage. We will, however, be tabling some amendments on Committee Stage.

The review of the scheme was damning and I welcome the Minister of State's willingness to commission and publish it. We need urgent responses and that is not understood in the Attorney General's office. A product like this is directly relevant to business and businesses are hungry for it. While best practice must absolutely be observed, it must also be acknowledged that the market is fluid. The product was badly needed over the last years and there was not time for it to be left waiting in an in-tray.

I always note that the amount that was sanctioned for these schemes is given. I would like to see the amount that has been drawn down. There is always a big difference between bank lending figures for what has been sanctioned and those for what has been drawn down because the conditions around drawdown at the moment are so strenuous and expensive that it does not happen for many people.

I refer the Minister of State to the report of the SME advisory group of 2012 which focused in particular on the old banks' obsession with personal guarantees. I remember how representatives of the SME advisory group zeroed in on personal guarantees when they appeared before the Oireachtas Committee on Jobs, Enterprise and Innovation. The Credit Review Office and the Credit Reviewer, John Trethowen, re-emphasised their criticisms of these and the committee will have the chance to discuss that with him next Tuesday. Are there views within the Department and the Government about the continuing reliance of the banking system on personal guarantees and the fact it is an ancient way of doing business? It belongs to the Vikings. That personal guarantees have been exposed as a very weak instrument over recent years should surely challenge the Minister of State to do something else.

I am interested in the proposal for State promotional financial institutions. What does that mean in English as opposed to Department-speak? Is it a new bank? Is it a new ICC? Is it a marketing organisation? Will it be another version of the SBCI that will act as a wholesaler and push that money out through the existing pillar banks?

I have spoken in detail about the change the Government introduced earlier in the year relating to banks exiting markets and facilitating the credit guarantee scheme to people whose loans are being sold, but there is still an issue with banks staying in the Irish market and selling their loan books. I refer specifically to Ulster Bank. The businesses, many of which are viable and trading profitably but are left with legacy loans from decisions made, find their loans being sold overnight to various companies. We heard all the usual suspects mentioned in respect of the other NAMA portfolio. For this to be most effective, we need to extend it to banks who are staying in the market and give every business whose loan is being sold the chance to buy or bid for that loan using the credit guarantee scheme. It must be said that the pillar banks - AIB and Bank of Ireland - are engaging. I think they are using SBCI funds to do that but there is an anomaly whereby if a person has a loan with a bank that is exiting the market, the credit guarantee scheme is there to support him or her, but if his or her bank has not taken that decision, he or she is not supported. Surely there is something radically unfair about that.

The issue of expense needs to be examined. In respect of the messaging of the scheme, perhaps the Minister of State will reflect on what the review said in its summation of the previous scheme. It said it was overly complicated, offered a narrow range of lending products and skewed the risk in favour of the State. That is pretty damning from a Government-appointed review and we need to ensure this scheme is accessible and not too expensive. I am still not convinced the premium reductions are enough, particularly in the context of 2015-2016 versus 2012-2013. Many businesses in this space are now stronger and have stronger trading accounts to back this up. If it is to make a difference in the market, the pricing of this product needs to be reviewed.

I am also very concerned about the disparities in regional lending rates which the Minister of State quoted. I have no doubt that businesses in Donegal, Sligo, Leitrim, Cavan, Monaghan and Louth are expanding and want to use this facility. We must look at why they are so low in terms of the national proportion. It is the same in Galway and Mayo. Again, the Department is constantly pushing a recovery that is Dublin-centric and Dublin-centred. A role for monitoring not just the credit guarantee scheme but the work of the microfinance scheme and the lending done by the LEOs should be stitched into the regional job action plans, on which the jury is still out, to ensure there is not such a regional disparity. It does not even come down to the value of lending. The number of credit guarantee schemes granted in Dublin, Kildare, Meath and Wicklow is 72, whereas in counties Louth, Monaghan and Cavan, the number is five. This does not seem to add up. There needs to be a focus on this and work needs to be done to ensure businesses in these regions are aware of the scheme and what can be done through that scheme.

The Minister of State referred to the necessity of looking at new and non-traditional sources of lending. I had hoped to speak on the Finance Bill but owing to the guillotine the Government imposed, I did not get the chance. We must look at crowdfunding. There is some movement towards it in the budget but nothing like what we need to do radically to support business. We need to encourage more investors to come into it. Rather than taxing their returns, which are minimal, with full USC and PRSI, we need to give crowdfunding a break and incentivise people to use it to lend to businesses, especially smaller businesses and start-up businesses in existing sectors which find it very difficult to get grant and loan support. There is so much that could be done around crowd financing through the LEO network and Microfinance Ireland if we made it more successful.

We have ignored and continue to ignore the role of the credit union movement in terms of SME lending. The Minister for Finance seems determined to freeze the credit unions out of this economic recovery even though they are the foundation of many societies, a locally led recovery and, in 90% of cases, responsible lending, unlike many of the pillar banks. Credit unions must be given a role in what the Government defines as non-traditional sources of SME lending.

This is important. I am frustrated by the delay. Again, I emphasise that I know the delay is outside the control of the Department but now that this will be passed by both Houses over the next month, we need to get it out there. It needs to be promoted and pushed. I am not sure the traditional pillar banks are good at doing that. They certainly did not put their shoulder to the wheel in terms of promoting the credit guarantee scheme in its old inception. I am very intrigued by this State promotional financial institution but in terms of selling and promoting it, that is the purpose of the LEOs and Microfinance Ireland. They have shown themselves to be able for the task, particularly Microfinance Ireland in the past 18 months. We need to get it out there and promote it. I look forward to giving some clarification on that. We will support it on Second Stage and will table a number of amendments to reflect what I have said.

4:05 pm

Photo of Peadar TóibínPeadar Tóibín (Meath West, Sinn Fein)
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One of the big failures of the Government has been its inability to create a functioning credit market. The dysfunctional credit market is a significant player in many of the problems we have in the State, for example, in the housing market where we have not been able to get credit into the hands of builders to meet the demand for housing. It has also played a significant role in the problems affecting small businesses. Much legacy debt is still in place. Many businesses are frozen out of growth and development because they are unable to service their loans or at least grow beyond servicing their loans.

One of the reasons we have this dysfunctional system is because the Government has created an oligopoly when it comes to banking. I mentioned this earlier in the debate on the Finance Bill. The Government decided to have a very concentrated and limited banking market when it created two pillars and a few smaller players. This oligopoly will behave like one.

In other words, in the market there is seller power and buyer weakness, which manifests itself in the behaviour of the banks. Yesterday’s announcement by Bank of Ireland that it would prohibit individuals from accessing less than €700 or lodging less than €3,000 at a desk is an example of people abusing their seller power in the market. It can be seen left, right and centre in high mortgage interest rates, high business rates and the closure of small banks around the country. If we had a more diverse and less concentrated banking market, there is no doubt in my mind that it would create far more competition and power among buyers and many of the problems regarding credit and access to finance would start to dissipate, but that does not look like it will change any time soon.

The Minister of State mentioned - fair play to him for doing so - that because of the malfunction of the credit market, the Government had been forced to create an ecosystem of financial products. That is a pity because it should have put the effort into fixing the initial market. This ecosystem was discussed at length by all sides in 2011 and 2012 and we mentioned that it needed to be customer-orientated from the start. It needed to be built around individuals. In 2012 the Government stated it would create a mechanism to allow €450 million be made available in business credit over the period of three years. There was big fanfare and the Taoiseach, the Tanáiste and the Minister for Jobs, Enterprise and Innovation were involved in the announcement. We were told it would provide much-needed credit for job-creating small and medium enterprises, SMEs, which were struggling in the market.

Debate adjourned.