The Government’s programme of re-capitalisation and bank restructuring has been instrumental, with the assistance of tax-payers’ money, in putting our banks on a sounder and more stable footing than they were at the height of the financial crisis. The banking sector is gearing up to once again be a key driver of economic recovery and growth.
While the scale of activity has reduced in recent years, banks continue to be the principal providers of credit to people trying to set up homes. Four out of every five new mortgages issued now go to either first time buyers or mover purchasers.
We are beginning to see tentative signs that the mortgage market may be stabilising. The latest quarterly data published as part of the IBF-PwC Mortgage Market Profile shows that the number of new mortgage loans issued to first-time buyers and mover purchasers during Q2 2012 increased on a year-on-year basis. This was the first time both of these home purchasing segments have increased year-on-year since Q1 2006.
With just over 14,000 new mortgages issued in total during 2011, mortgage market activity remains subdued. Further uplift in activity is primarily an issue of demand, determined by factors such as perceptions on where house prices are going. The new property price register will be helpful.
The most recent Central Bank data shows that 10.9 per cent of private residential mortgage accounts are in arrears over 90 days; some 85,000 mortgages have been re-structured by banks. While official Central Bank figures are awaited, we know that the level of arrears across the buy-to-let and investment property market is significantly higher and is likely to be at 20 per cent or more.
Banks are genuinely trying to assist customers to return to financial sustainability and to keep as many people as possible in their homes. Thus, the level of re-possessions is, to date, very low: official data show a re-possession rate of 19 per 100,000 mortgages compared to 76 per 100,000 in the UK.
Many of the customer solutions in place are of a short-to medium-term nature. Lenders are now increasingly focused on delivering workable, longer term solutions for customers in more serious financial difficulty. Further considerable progress is being made by banks through a mortgage arrears resolution strategy (MARS). Piloting of various new loan modification options has been completed and rollout is under way.
Mainstream lenders are recording increased levels of customer engagement as well as a significant improvement in the quality of customer information provided through the Standard Financial Statement.
Early engagement by borrowers with their lenders is critical to finding a workable arrangement that will assist in the management of financial difficulties. To further facilitate this, lenders are developing comprehensive outreach programmes for customers as well as facilitating independent non-bank information and advice services for mortgage customers in difficulty. The measures being taken will effectively address the majority of difficult situations.
IBF has long recognised the need for and indeed called for the reform of the law with respect to debt and debt enforcement. The new personal insolvency regime, as proposed by government, needs to be carefully calibrated and fully aligned with MARS programmes in order to provide the means by which lenders and borrowers can collectively address the problem of accumulated debt over the medium and long term.
A number of concerns remain, however. Principal among these is the absence to date of any official remedy arising from what is known as the ‘Justice Dunne judgment’. This has created an unintended legal impediment to banks’ ability to enforce security on residential property in situations where all remediation measures have failed.
Lending to SMEs
The issue of SME access to credit generates much debate. The unique role SMEs play in the economy is unquestioned and they deserve the maximum support possible from the banking sector. Banks have re-affirmed their commitment to maximise the supply of credit to viable businesses with a sustainable future.
Thus, more than €6 billion in new and re-negotiated lending has been drawn down by SMEs here in the year ending June 2012. €26.6 billion in credit is currently outstanding. The government-appointed independent Credit Review Office reports that 80 per cent of formal credit applications are being approved by the two pillar banks.
Unfortunately, the level of financial distress across the SME sector here is at an all-time high. There are multiple factors at play, including the fact that many owners of good solid SMEs engaged in speculative property investment during the growth years. The resulting entanglement of this latter business with the wealth-producing business is a drag on the overall credit worthiness of the business and must be factored in by banks when making credit decisions.
Many business owners have seen default or slow payment by debtors as well as demand for their goods and services shrink. In some sectors, over-capacity is a major problem. In none of these cases is the extension of credit a panacea for the fundamental and underlying problems.
It is particularly important that SMEs be constantly encouraged to formally apply for credit as it is only by this means that they can truly establish the viability of the business proposition for purposes of bank credit support.
Various banks have a wide range of finance and non-finance initiatives to support viable businesses. To supplement this, the IBF has introduced a number of industry-wide initiatives such as the ‘Business Plan and Cashflow Guidance’, a joint initiative by IBF and the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I). This is designed to assist SMEs and micro-enterprises in developing and presenting a robust business plan and cash flow forecast as a key part of a credit application. Also, the www.smallbusinessfinance.ie website, developed with Chambers Ireland, is proving a popular online information resource for SMEs.
The banking sector is also working closely with government on various initiatives in support of the small business sector such as the recently launched Credit Guarantee Scheme, which has the potential to address some perceived barriers to credit.
A re-capitalised and re-structured banking sector is committed to playing a central role in driving Ireland’s recovery and growth, and to doing this in collaboration with all key stakeholders. Significant progress is being made. Much more remains to be done. This can only be achieved through ongoing collaborative effort on the part of the banking sector, government, regulators and other key stakeholders.