Imelda Henry (Fine Gael) | Oireachtas source

I welcome the Minister of State to the House. This is timely legislation because the Central Bank has just produced its latest SME market report which was compiled by economists in its financial stability section. The report aims to give an updated picture of the developments in the SME credit market. It is important for us to note the main conclusions of the most recent report. Gross new lending to non-financial, non-real estate SMEs shows positive growth since the start of 2014. For the first three quarters of 2015, year-on-year growth rates in quarterly new lending were 26%, 33% and 4.9%, respectively. Despite this growth, the overall stock of outstanding SME credit continues to decline, implying that the volume of repayments is outstripping new lending in each quarter. Since the last report, outstanding credit has declined by 8%. Compared with other euro area countries, new lending, including renegotiations, relative to domestic demand is currently low.

While SME perceptions of bank willingness to provide credit have improved, 39% of Irish SMEs still consider access to finance a major concern. This share is similar to what is known as the EU2 countries of Spain, Portugal, Italy and Greece but above what is known as the EU1 countries of Austria, Belgium, Germany, Finland, the Netherlands and France.

Interest rates on Irish SME loans are high relative to the euro area. Furthermore, SME rates did not decline in line with the euro area from 2014, particularly relative to the EU2 countries. The difference between SME and large firm interest rates is also relatively high in Ireland. The latest data show a slight reduction in interest rates for smaller SME loans. In addition, the share of SMEs reporting interest rate increases is declining.

Bank finance application rates have been declining since 2012, driven by declines in applications for renewed and restructured products. Loan application rates, which have been steady since 2013, are low by European levels. The majority of finance applications are for working capital purposes, although this rate is declining. Bank rejection rates have declined slightly since the last report, currently 15%, down from 16%, but this rate is above euro area averages of between 8% and 9%. Firm-level data show that the share of SMEs with no outstanding debt is rising while debt-to-turnover ratios are declining. Furthermore, it is evident that the majority of fixed asset investments are currently financed through internal funds-retained earnings rather than external bank finance. SME default rates are declining. Currently, 19% of loans and 31% of total outstanding balance are in default, which is down from 26% and 41%, respectively, in 2013. Default rates remain highest in the construction and hotel-restaurant sectors.

SME profitability and turnover have improved substantially since 2013. The recovery in activity has been strong by European standards. For example, the net increase in profits, which is the share of SMEs reporting increases minus share reporting decreases, is currently 28% in Ireland compared with 5% in EU1 and 10% in EU2 countries. Similar trends are observed for turnover changes. However, improvements in business performance are weaker for smaller SMEs, both in Ireland and the euro area.

Much of this is good news and shows the progress made by this Government since the crash. It also shows the importance of the passing of this legislation. As SMEs and others have noted, the legislation is intended to address the competitive disadvantage of SMEs that lack collateral and, as a result, find it difficult to access finance. It is fair to say, and the Minister of State will agree, that the original legislation was not as successful as was hoped. The Government recognised this and a review was commissioned. Action was taken in the form of this legislation. It is vital for SMEs, the backbone of the economy, that this legislation is enacted as soon as possible. I commend the Minister for his action in remedying the original legislation.