The Minister for Jobs, Enterprise and Innovation, Richard Bruton, has today published the Credit Guarantee Bill 2012.

The scheme will provide a 75% state guarantee to banks against losses on qualifying loans to firms with growth and job creation potential.

Initially, the scheme will facilitate up to €150m of additional lending a year to SMEs.

The announcement represents delivery of key first quarter commitments under the Action Plan for Jobs 2012.

For every €150m of additional lending, the scheme is expected to benefit over 1,800 businesses. The cost of the scheme per €150m of lending is €6.38m.

However, this does not take into account benefits to the exchequer this lending will bring in terms of increased tax receipts and decreased social welfare payments.

When these benefits are taken into account, the net gain to the Exchequer is over €25m per €150m of lending.

Minister Bruton also announced that he has awarded a contract for the practical oversight, management and operation of the Guarantee Scheme to Maynooth-based company Capita Asset Services following a competitive tendering process.

How the scheme will work

The State will enter into an agreement with each lender and will accredit the lender to participate. The guarantee will be given to each lender for a collection of loans (a portfolio approach) rather than individually (loan-by-loan basis). The choice of loans which make up the portfolio is at the discretion of the lender, provided the borrowers meet the eligibility criteria.

An annual portfolio claim limit will be set for the aggregate value of loans for each lender, thereby capping the State’s exposure. Once a lender’s default claims have reached their portfolio claim limit, any further losses must be borne by the lender and will not be eligible to be reclaimed from the State.

Both the borrower and the bank retain exposure in the event of default. The State is exposed only to the portion of the loan guaranteed up to a pre-specified limit.

The period for which the guarantee is provided (as distinct from the term of the loan) is three years.

The State Aid framework sets the requirement that a premium must be charged to the borrower in return for the State guarantee. Recipient businesses will be required to pay the Minister (the Guarantor) an annual premium of 2% on the outstanding balance of the loan, assessed and collected annually in advance.

A qualifying enterprise must not employ more than 250 persons.

There are a number of exclusions including primary production in agriculture, horticulture and fisheries, refinancing of existing debts and overdrafts and property-related activities. The food and drinks sectors will be eligible for the Scheme.

The Bill will now be introduced to the Oireachtas, and it is expected that it will be enacted shortly.

Small business groups welcome the bill

The Small Firms Association has welcomed the publication of the bill.

“After four years of lobbying by the SFA, we welcome the eventual delivery of a credit guarantee scheme, which we expect to be fully operational by the end of the second quarter this year. Access to credit is vital for small business survival and expansion. The credit guarantee scheme should move the risk pendulum of banks to say ‘yes’ to more small businesses and that is most welcome,” Ian Martin, SFA's chairman said. 

However, he noted that the cap on the Scheme of up to €150m of additional lending per annum, which will benefit just 1,800 businesses, is concerning.

ISME, the Irish Small & Medium Enterprises Association, has also welcomed the publication of the Bank Guarantee Bill, for which the association has lobbied for a number of years.

However, ISME chief executive Mark Fielding sounded a warning to Government that they need to be vigilant to ensure that the banks do not use this guarantee as a substitute for loans that should have been made without the scheme.

In a statement, Mr Fielding said that this was a feature of a previous EU susidised loan scheme in the 1990’s when the main banks diverted cheaper finance to blue chip companies to the detriment of the SME sector.

"It might be appropriate that the Minister remind the bailed-out banks that this finance is to be additional and clearly reported on, unlike the smoke and mirrors obfuscation surrounding the previous bail-out six billion," he added.

Irish Banking Federation says scheme has potential

The Irish Banking Federation says the scheme has the potential to complement and enhance existing sources of SME credit and they will continue to work with the Department of Jobs, Enterprise and Innovation in support of these schemes.

In a statement, it said "notwithstanding the challenging environment faced by all, IBF and its member banks remain fully committed to supporting in every way possible the SME sector as an all-important driver of economic recovery and growth."