New rules will force banks to tell firms when they could be branded as 'non co-operating'

BANKS WILL HAVE to give more information around refusing loans and tell small businesses if they are in danger of becoming classified as “non co-operating” under new rules.

The Central Bank regulations apply to regulated lenders, other than credit unions, from today. Credit unions must comply with the directive from the start of 2017.

The rules aim to bring greater transparency to banks lending to small and medium businesses by requiring lenders to explain why refused applications were rejected and expanding the grounds for appeal.

The new legislation applies specifically to SMEs applying for a loan. Some of the most important features that will be brought in under the new rules include:

• Providing borrowers with reasons for declining credit, in writing, that are specific to their application
• Contacting borrowers who have been in arrears for 15 working days
• Warning borrowers if they are in danger of being classified as not co-operating
• Expanding the grounds for appeal and setting up an internal appeals panel
• Providing greater protections for guarantors

Central Bank director of consumer protection Bernard Sheridan said that the regulations “aim to strengthen protections for SMEs, while also facilitating access to credit, by introducing specific requirements that regulated lenders must comply with”.

Importance for businesses

Speaking to Fora, Patricia Callan, the director of the Small Firms Association, said that she expects the rules to be an aid for SMEs.

“I think that they will have an impact. They are trying to give consumer-like protection to SMEs,” she said. “One of the big things we would have got from feedback would be that there is usually a standard rejection letter which is like a drop-down menu.

“Going into specifics can let you improve your application which is very important, as are deadline and feedback times.”

She added that many businesses that the rules will apply to may already have made efforts to sort out their issues with banks, however she said that the rules are likely to be important in the future.

SFA director Patricia Callan

“It is less of an issue than it was during the crisis, many of the issues now relate to legacy debt, but I think it is important to have the rules,” she said.

ISME chief executive Mark Fielding said that while he welcomed aspects of the new rules, such as the protection for guarantors, he added: “We have found that in the past the code was not publicised or promoted very much by banks, this needs to change.”

Appeals

Several banks have already taken steps to improve the loan-applications process. For several years, business customers of both AIB and Bank of Ireland have been able to appeal refusals to the Credit Review Office (CRO).

The CRO is a state-backed appeals body for companies refused bank loans or that have existing credit lines cut. Ulster Bank recently joined the scheme voluntarily and Permanent TSB, which announced a new bank offering for SMEs at the end of 2015, is also set to make the scheme available to its customers.

The office overturns refusals in about half of the cases that it processes, although only a small number of businesses make use of the body.

A survey of 1,500 SMEs published by the Department of Finance last September showed just over half the companies that were refused credit said they were unaware of the CRO.

The study also found that, overall, banks either fully or partially approved 74% of applications from SMEs.