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Central Bank: Lending by banks beginning to recover

A new report from the Central Bank indicates that lending by banks has begun to recover this year, particularly in the mortgage market.

However, it warns that unexpected bad debts may stifle the supply of credit when Government supports are phased out.

The report, which is published as part of the bank’s Economic Letter series, finds that demand for credit fell last year with the onset of the pandemic.

It also finds the standards banks followed on lending were ‘broadly unchanged’ during the pandemic.

It also finds that consumer lending remains subdued and is unlikely to recover until spending patterns return to normal.

Lending to small and medium sized enterprises (SME’s) began to recover late last year.

The amount of new lending to SME’s was 90% higher in the fourth quarter of 2020 compared to the second quarter.

However, the amount of lending was still 15% less than the fourth quarter of 2019. But it was greater than loan amounts over the period 2010-16 which followed the financial crisis.

The report finds that SME lending varies significantly across sectors.

Loan volumes are strong mainly for construction and agricultural enterprises.

Hotels for example took out 85% less in loans in the fourth quarter 2020 compared to the same period in 2019.

Borrowing by other service-oriented firms is also ‘far below normal levels.’

The report also examined the standards applied by banks to personal customers applying for mortgages who were in receipt of Covid 19 support payments.

The report finds that “…no lenders reported outright rejection of loan requests if a prospective borrower is receiving PUP/TWSS or employed in a Covid-19 impacted employment sector.”

However, it did find that a ‘tightening’ of standards was observed.

The report strikes a cautionary note about future demand for credit as the economy recovers. It says that the withdrawal of government supports may lead to “an unexpected deterioration in credit quality on lender balance sheets”.

This, in effect, means bad loans or debts that won’t be repaid.

This in turn may lead to a reduction in the credit provided by banks which “…could be worsened by the decision of one of the main lenders to exit the Irish market.”

The letter says this should be taken into account when decisions are being made on phasing out government loans and loan guarantee schemes.

Article Source – Central Bank: Lending by banks beginning to recover – RTE – Robert Shortt

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