Sensible lending policy is in the public interest

ING Bank’s chief risk officer, Wilfred Nagel, about the need to increase equity of SMEs.

“Dutch small and medium-sized enterprises (SMEs) have been facing difficulties for some time. Many, including the CPB Netherlands Bureau for Economic Policy Analysis (in the Central Economic Plan 2014), are pointing at the banks, giving the impression that they have too little capital for lending to SMEs. Having said that, SMEs are clearly having problems and banks have a responsibility to help solve them.

It is sensible to make the right diagnosis and take suitable measures. It then becomes clear that even more additional capital for the banks is not only unnecessary but will also not lead to easier lending to SMEs, which above all need more equity.

“There is a need to increase equity of SMEs”

Lower demand for credit

Firstly, it is important to point out that the fall in lending to SMEs in the Netherlands is largely a result of lower demand for credit and so what we are now actually seeing is a fairly normal correlation between lending and the state of the economy.

Healthier financing model

Secondly, Dutch SMEs are already more dependent on bank credit than those in other comparable countries. It is, therefore, sensible to move to a healthier financing model for SMEs and not to give a new boost to increasing debt positions. For this reason, ING is working very actively promoting initiatives in this area, such as the Stimuleringsfonds Ondernemend Oranje Kapitaal.

No lack in lending capacity

Thirdly, banks do not lack lending capacity. Dutch banks have significantly improved their capital positions since the financial crisis. For example, ING amply meets all current standards and so is in a position to grant just under €4 billion of credit each week worldwide without putting pressure on its capital ratios. Furthermore, the fact is that both customers and credit providers benefit if banks do not stash their capital away but lend it to creditworthy customers.

Prudent risk policy

This does not of course detract from banks, and certainly also ING, applying a prudent risk policy. Many factors determine the customers that a bank lends to within the scope of its balance sheet, including the nature and duration of the relationship with the customer, the risk profile of the proposed loan, the price the bank receives for taking on risk, the extent to which the loan contributes to the creation of concentration risk on the balance sheet and the requirements of the sustainability policy being pursued.

The importance of proceeding carefully in this respect, is underlined by recent experiences with lending to SMEs. Dutch SMEs made up 5% of ING’s total credit portfolio in 2013 but contributed 22% of the total addition to the reserve for loan losses. If we assume 4% leverage, every euro of capital lost in this way is €25 less available for businesses which are creditworthy.

Don’t stretch approval criteria

Against this background, the question is what actual public interest is served by loosening credit standards applied to SMEs? And how does this relate to the aim of safer banks? In fact, banks are now being told to stretch their approval criteria, which is the same as calling for more financing (often of losses) and expansion instead of reducing SMEs’ dependence on debt.

This is undesirable from the perspective of both the bank and its providers of capital and of the financing structure of our economy.

On top of this, a further strengthening of the capital positions of large Dutch banks will not lead to more lending to SMEs as this only works if both the bank and potential providers of capital are convinced that the investment will be used for profitable economic activity. In other words, granting capital to creditworthy parties at a reasonable return. Gathering capital only to jeopardise it by lending to parties that do not meet the minimum requirements is not a very productive strategy.

Those calling for a relaxation of bank lending to SMEs are, therefore, promulgating a sort of industrial policy at the cost of banks’ savers and providers of capital. This is not appropriate to a market economy and is particularly unwise given the need to increase not debt but equity of SMEs.”

Read Wilfred Nagel’s contribution (13 December 2013) about “SMEs need capital more than the banks.”