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C Bank to focus on bad SME loans

Friday, October 19 15:44:11

The coming months will see the Central Bank focus their attention on getting the banks to resolve their legacy bad and poorly performing loans to SMEs.

The Central Bank's deputy Governor today said that it is important that the efforts underway for household mortgage arrears need to be matched for the banks' SME portfolios.

Earlier in the year, the Central Bank commissioned an in-depth analysis of the leading banks operational capacity for SME loan review, recovery and resolution.

"The results were in many respects dismayingly similar to those regarding mortgage arrears operations. For example, the reviews found the following: limited specialist skills, limited ability to scale up to conduct restructuring and resolution activity, inconsistent quality and depth of financial analysis of borrowers, incomplete financial information collected from borrowers, lack of portfolio segmentation and limited use of KPI's," he said.

"More fundamentally, it appeared that portfolios were largely subject to rescheduling and extended forbearance rather than a determined effort to restructure loans and deploy a wide range of workout options. Given the extent to which many SMEs entangled themselves in property investment, there is clearly a difficult task facing the banks. The message from this review work is that here too we need to see a step change in operational capacity and a mindset change in terms of tackling, rather than deferring, problems."

"So, while we will not be rolling out the same extensive regulatory framework as is in place for mortgages and mortgage arrears (due to the different consumer protection standards that are relevant), a key area of regulatory focus in the coming months will be to press the banks to effectively re-underwrite their SME portfolio and more decisively tackle the challenge of recovering and as necessary restructuring problem loans. The banks need to raise their game on the handling of problem SME loans and the Central Bank intends to press them to do just that," said Mr Elderfield.