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Government must ensure that banks provide credit to small and medium enterprises – Morgan

25 November, 2008


Speaking in the Dáil this evening, on a Private Members' Motion on Credit Lines for Small Businesses, Sinn Féin Economics Spokesperson Arthur Morgan TD said the consequences of allowing banks to continue to refuse loans to Small and Medium Enterprises (SMEs) would be dire and called for a rapid Government response to the problem.

Deputy Morgan the now that the Government has bailed out the banks they must ensure that they live up to their responsibilities and provide credit to our enterprise sector.

He said, "The financial drought facing small and medium sized enterprises is clear for all to see. We have all heard representations from local small and medium sized enterprises desperately trying to find capital. The latest ISME survey shows that over half of its members are being refused new finance or extensions to their existing credit lines.

"The response from the banks shows that senior management have buried their heads in the sand and are devoid of any forward thinking. Having bailed them out in the first place, the Government must now ensure that the banks live up to their responsibilities and provide credit to our enterprise sector.

"The consequences of allowing banks to go on refusing loans to SMEs will be dire. A shortage of credit coupled with delays in payment from customers invariably leads to serious cash flow problems for even the most financially healthy enterprises. This means that companies will find it increasingly difficult to pay the wages of their employees, ultimately resulting in layoffs and even liquidation.

"SMEs form the backbone of the Irish economy. They are one of our best hopes of economic recovery. If the Government does not act now, the credit drought will perpetuate the recession and lead to immeasurable economic and social problems.

"It was the banks that created this credit crisis through reckless behaviour, and it was this Government and the Fianna Fáil party - blinded by their love affair with dubious developers - that turned a blind eye to irresponsible lending practices.

"There are options still available in accessing finance. One such option, is the European Investment Bank small business operational fund. The fund was launched a month ago to address the difficulties facing the smaller enterprises and since then lending institutions in 22 member states of the EU have joined up to it.

"Ireland continues to be one of only a handful of countries yet to access this fund through their financial institutions. Under the fund the EIB has earmarked up to €15 billion for 2008-2009 with a further €15 billion for 2011. This is something we will have to get the banks to adopt if SMEs are going to be given any chance of surviving in the current economic climate.

"The problems facing SMEs must be met by a rapid response from the Government. The Government cannot continue to just sit back and do nothing while SMEs go to the wall. It's time for the Government to reengage and it's time for a proactive response to the credit crisis." ENDS

Full text of Deputy Morgan's contribution follows:

PMB

A Cheann Comhairle

We are broadly supporting the Labour Party Motions and urging the Government to show leadership in what is becoming an increasingly dangerous situation for small and medium sized enterprises.

The financial drought facing small and medium sized enterprises is clear for all to see.

We have all heard representations from local small and medium sized enterprises desperately trying to find capital.

The latest ISME survey shows that over half of its members are being refused new finance or extensions to their existing credit lines.

These are not unknown or high risk companies with no credit history; but well established enterprises that have been trading for over a decade and have a long standing relationship with their banks.

The reason for this almost blanket refusal is clear: having recklessly given billions of Euros in loans to developers, the banks who are now faced with whopping debts and have responded in an ultra conservative way, shutting up shop and rejecting even the most solid enterprises.

The response from the banks shows that senior management have buried their heads in the sand and are devoid of any forward thinking. Having bailed them out in the first place, the Government must now ensure that the banks live up to their responsibilities and provide credit to our enterprise sector.

The consequences of allowing banks to go on refusing loans to SMEs will be dire. A shortage of credit coupled with delays in payment from customers invariably leads to serious cash flow problems for even the most financially healthy enterprises. This means that companies will find it increasingly difficult to pay the wages of their employees, ultimately resulting in layoffs and even liquidation.

SMEs form the backbone of the Irish economy. They are one of our best hopes of economic recovery. If the Government does not act now, the credit drought will perpetuate the recession and lead to immeasurable economic and social problems.

It was the banks that created this credit crisis through reckless behaviour, and it was this Government and the Fianna Fáil party - blinded by their love affair with dubious developers - that turned a blind eye to irresponsible lending practices.

The crucial difference between then and now is that this time the public are acutely aware of every move the Government makes and will recognise any failure on the part of the Government to act.

Because our economic future relies on taking radical measures, the Government will have to abandon its hands off approach and play a leading role in providing credit for SMEs.

There are options still available in accessing finance. One such option, is the European Investment Bank small business operational fund. The fund was launched a month ago to address the difficulties facing the smaller enterprises and since then lending institutions in 22 member states of the EU have joined up to it.

Ireland continues to be one of only a handful of countries yet to access this fund through their financial institutions.

Under the fund the EIB has earmarked up to €15 billion for 2008-2009 with a further €15 billion for 2011. This is something we will have to get the banks to adopt if SMEs are going to be given any chance of surviving in the current economic climate.

While banks form one part of the cash flow problem- the late payment of bills is the other. Small and medium sized enterprises have been highlighting this problem for a long time. Small businesses are now waiting on average 65 days for payments- a two week increase since the adoption of legislation aimed at reducing the delay. The 2002 Late Payments Legislation, which this Government was responsible for, did nothing to improve repayment of bills. Rather than addressing the cash flow problems of smaller businesses, the legislation actually exacerbated delays in payments between small and larger companies, resulting in higher dependence on credit streams.

While obliging the banks to join up to the EIB fund will have some positive impact, we firmly believe that the Late Payments legislation will have be revisited in the short term if business transactions are to be radically improved.

It is trade between enterprises which makes up the bulk of business transactions and we will have to do something more concrete than simply calling on state departments to settle their debts within 10 days. I would have doubts over how practical this proposal really is and whether this can make a significant difference whan SMEs are waiting for other bills for up to 120 days.

The reality is that enforcement of the 30 day rule is lacking and that the establishment of proper mechanisms to ensure companies comply with the rule would be the most effective remedy. This could be achieved by examining a number of proposals which have been suggested such as a type of small claims court for business debts.

This legislation needs to be revisited as a matter of priority as companies will continue to be overly reliant on credit to meet their cash flow problems.

Finally I would like to express my support for strengthening the role of county enterprise boards. I believe that enterprise boards will continue to play a crucial role in supporting our smaller companies while encouraging new enterprises into business. There is no doubt that we are in a fundamentally different economic climate but there are still many businesses trading and many entrepreneurial opportunities exist if the right structures are in place. To meet these new challenges, the support structures of enterprise boards should be enhanced.

The current grant structure for county enterprise boards, which has been in place for over a decade, has set grant aid levels which are too low and quotas which are too rigid. Employment grant aid has remained at €7,500 for the past decade despite increases in the minimum wage whereas quotas relating to the number of businesses that are approved for funding is too rigid.

County Enterprise Board support schemes should be revised with increased employment grants, stock grants and cashflow support grants. Overall Enterprise Boards need more flexibility and the Government must ensure that they are properly resourced going forward.

The problems facing SMEs must be met by a rapid response from the Government. The Government cannot continue to just sit back and do nothing while SMEs go to the wall. It's time for the Government to reengage and it's time for a proactive response to the credit crisis.

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