Banks criticised for failing SMEs with automated loan rejections

Times

5 hours ago

Banks are failing small firms and have created a 'void' in their services by ditching relationship managers and ­relying on automation to manage loan applications, according to the state body Credit Review.
In a stinging report published last week, Credit Review also said that banks needed to reinvest in human expertise to offset the shrinking availability of credit in the market and compensate for tighter lending criteria in recent years.
'Bank balance sheets have shrunk and shrunk since the financial crisis but the question now is what's actually happening between banks and borrowers,' said Catherine Collins, head of the service and author of the report.
'For those it works for, automation is great. The problem we see is that for those with a more complicated business structure or model, they need some human interaction.'
The report said that in many cases that came before Credit Review, which judges credit appeals brought by small businesses to loan rejections, 'considerable expertise' was required to find the appropriate solution for borrowers but banks were shifting that burden on to customers.
'There is a cost to the SME borrower of acquiring that expertise that has now been passed across by the bank who are no longer providing it to certain segments of the SME market (typically smaller borrowers),' the report said.
It noted that credit advanced to non-property SMEs had fallen by 18 per cent from its pre-Covid level, due in part to the exits of Ulster Bank and KBC and the resulting lack of competition in the ­market. But the proportion of small businesses applying for finance each year had also fallen from more than one in three to just one in five.
The lack of credit flow to indigenous small businesses has been flagged by Department of Finance officials as a potential problem for maintaining domestic demand in an economy facing grave risks from disruption in international trade and investment.
Credit Review blamed the decline in the market on shortcomings in the credit application process, especially in terms of accessing expertise, how banks communicate, timeliness and flexibility.
'The responses that I see issued on bank credit decline letters remain generic, high level and unhelpful to many of the borrowers using our services,' ­Collins wrote.
The average loan decision turnaround time of 24 days was also inhibiting small businesses from seeking bank finance, Collins said. The regulatory requirement for SME lenders is 15 days.
The lack of standardisation between banks and the difficulty of switching from one to another was also a problem that limited competition and choice, she said.
As a result, many businesses were now turning to alternative sources of credit from non-bank debt providers, such as invoice discounters or crowdfunders, which were in some cases subject to different regulatory requirements to banks. This segment of lenders has grown to make up more than a third of the market.
Just under 60 per cent of the appeals brought to Credit Review since it was established by the Department of Finance in 2010 have been upheld.
But Collins said not enough businesses were using its services, which can help firms to navigate the tricky process of accessing bank finance. 'SMEs are tricky, they require judgment calls,' she said. 'At the end of the day, you need to talk to someone. The pain is worth the gain.'