Euromoney speaks to the founder of a new crowdfunding platform built to channel investors seeking better rates on their cash than banks now pay on deposits into funding SMEs that banks have turned down for loans.
This entrepreneur has been quietly advising the finance director of a small but fast-growing UK company that had applied for a bank loan only to be confused to find its application neither accepted nor rejected but subject to months of delay. The bank has written letters to the company explaining it would soon receive a response – through the post. “I had to explain to the finance director: ‘you are not being turned down for a loan here. You are being discouraged’.”
For the company, that amounts to the same thing. For the banks, now under intense political and regulatory scrutiny, discouraging borrowers is a way to avoid stacking up the numbers of SME loans being rejected.
When the ECB announced the results of its comprehensive assessment and stress test of Europe’s biggest banks at the end of October, vice-president Vítor Constâncio raised expectations that this would help economic growth by facilitating more lending. But the banks say that weak demand from borrowers due to their lack of confidence in economic growth is the root cause of lack of lending and not constraints on supply. The banks are liquid and want to add earning assets.
The banks have been saying this consistently and for so long that it’s almost tempting to believe them. Bank lobby group the Institute of International Finance points out that credit growth has been in negative territory in the periphery since late 2010 and that the pace of credit expansion has markedly decelerated in core countries since last year. It says that a recovery in euro area credit growth does not seem imminent. However, proponents of a free market might observe that if banks really do want to induce borrowers to take out loans, the best way to achieve that would be to cut the price of them.
The ECB’s most recent SME survey highlighted that around 70% of Europe’s SMEs, which together employ nearly 70% of European workers and which have traditionally relied on banks for the majority of their funding, had not applied for a bank loan since mid-2010. Explanations certainly include a lack of need for borrowing. But notably, the cost of bank loans and fear of rejection continue to discourage many SMEs even from applying for a loan, particularly in Greece, Ireland and Italy but also in the Netherlands and France as well as in Spain and Portugal.
Being discouraged is now a far bigger factor in companies not taking on a loan than in being officially rejected.
Paul Donovan, economist at UBS, instead of asking banks for loan data, has looked instead at various proxy indicators on corporate demand to borrow money, mainly relating to intercompany credit via invoicing, vendor finance and such forms of particular importance to SME businesses. Often these comprise forms of short-term, working capital.
Donovan finds that in the French economy, for example, there is a clear willingness to borrow and, indeed, a corporate willingness to lend. Intercompany credit in Italy is not especially exciting, but it does not suggest any strong aversion to borrowing – more a mundane pace of credit creation associated with normal business activity. In aggregate the data from intercompany credit does not suggest that companies have an abnormally weak desire to borrow at the moment. In the US and most of the main euro area economies the demand for credit is good – one notable exception being Spain.
It may be that banks have conserved capital and constrained asset growth in the run-up to the AQR and will now show themselves more willing to compete for borrowers. But if they don’t and if at the same time companies generally seem willing to borrow, just not from banks that continue to discourage them, then what – remind us again – is the point of banks?