Minister for Finance Michael Noonan has suggested that the Central Bank make contact with economist Morgan Kelly following his warning that the European Central Bank is planning a "clean-up" of Irish banks.

In a lecture at University College Dublin, the economist suggested the ECB move will see large numbers of small and medium-sized businesses go under.

Speaking as he arrived at a Eurogroup meeting in Brussels, Minister Noonan said Mr Kelly had a good record in the past, adding: "Anything he says we'll take it seriously."

Mr Noonan welcomed Mr Kelly's commentary and said it was important that "very good economists" get involved in the national debate.

Mr Kelly said the ECB wished to have a "trial run" on Ireland and take action against the banks' non-performing loans.

He said if there was to be a quick clean-up of the Irish banks, Ireland could be facing something "very, very horrible quite soon".

However Central Bank Governor Patrick Honohan has said the ECB is not going to single Ireland out for for special treatment over non-performing SME loans.

He said the purpose of the forthcoming ECB stress tests on 128 European banks - including five Irish banks - was to remove market and government doubts about the ability of banks to absorb losses with their own shareholders funds.

Mr Honohan said he did not believe Mr Kelly's recent remarks on the state of lending to SME's would cast further doubt over the Irish banks.

The governor said he has been concerned for several years about the situation of debt to the SME sector and he is watching closely to see what impact the ECB stress tests may have on the capital situation in Irish banks.

"Am I worried about Irish bank lending to SMEs? [I] have been worried for some time. Am I worried the ECB is going to do something to make it worse? No," he said.

"I don't see anything that should raise particular concerns."

Meanwhile, economist Alan Ahearne said he does not see why upcoming bank stress tests would wipe out the small and medium-sized enterprise sector.

Dr Ahearne, Head of Economics at the National University of Ireland, Galway, said: "The upcoming stress tests means that the ECB as the new financial regulator is going to look at the banking system and see whether the banks need more capital to be able to deal and address their problem loans.

"And if they do, I mean if that's the way things work out, well the banks will have to raise more capital, but the banks wouldn't turn around and close a large chunk of their SMEs."

Dr Ahearne, who also served as a special advisor to former minister for finance Brian Lenihan, said there were a lot of loans in the SMEs and they are complex.

However, he said that it does not make sense for the ECB to effectively close down the sector when the ECB had pushed for the new legislation to ensure SME loans could be restructured in a way that kept the business element going.

The director of the Small Firms Association has said banks need to ensure the viability of businesses into the future by parking their property debts until the economy improves.

Patricia Callan said, in her view, it was "entirely feasible" that after a number of years of economic growth business owners would be in a position to repay these property debts.

Ms Callan said the key thing was for the banks to separate property debt from business debt to ensure that those that can survive will survive.

She also said there needs to be a mechanism to assess the profitability of firms and to explore the employee numbers of businesses before a decision on the business in total is taken by a bank.

Ms Callan said some companies have had good outcomes, including write-downs of debt, but she said Revenue had a role to play too.

'Non-performing loans still a risk for Irish banks'

Fitch ratings agency has said that the resolution of impaired loans is still a risk for Irish banks. 

It noted that Central Bank figures show that extremely long-term delinquencies continue to rise, despite an overall reduction in mortgage arrears.

The ratings agency said that the recovery in asset quality remains "fragile", despite some signs of stabilisation.

But it added that non-performing loans are likely to have plateaued at both Bank of Ireland and AIB at the end of the year, ahead of the ECB's comprehensive review.

Impaired loans had been increasing steadily since 2008 but fell by 3% and 2% at Bank of Ireland and AIB respectively at the end of last year.

It said that it expected non-performing loans to peak this year and then gradually reduce.

The agency concluded that after the Central Bank's assessment, Bank of Ireland and AIB are more resilient and unlikely to need more capital. 

More SMEs being refused credit - survey

The Irish Small and Medium Enterprises Association (ISME) has reported an increase in the rate at which banks are refusing credit to small and medium businesses.

In its latest credit watch, ISME noted that 54% of requests for credit from SMEs were turned down by the banks.

This compares to 50% in the previous three-month period.

The survey also showed that 17% of respondents who required bank finance did not apply for various reasons, an increase from 10% in the previous quarter.

Of those, 21% said they were actually discouraged by their bank from making an application and another 58% were afraid of a reduction in existing facilities.

ISME said the increase in refusals coincides with the ending of the Government requirement on the main pillar banks to sanction €8 billion in lending to SMEs each year.

Mark Fielding, the chief executive of the association, said the speed at which the banks had moved was in stark contrast to their delays in sorting out their balance sheets and gaps in expertise.

The survey also found that 60% of respondents had increases in bank charges imposed and that 18% have seen increased interest rates.

Of the companies surveyed, 69% said the Government is having either a negative or no impact on SME lending.

The survey was conducted in the week ending 28 February and over 900 owner managers of SMEs responded - a rate of 9.5%.

In a statement, AIB said it approved €4.3 billion in credit facilities for 32,000 Irish SMEs last year.

The bank said it would continue to support the sector this year and was "capitalised and equipped" to meet demand.

Banking federation defends handling of SMEs

The Irish Banking Federation has defended the way banks are dealing with small and medium businesses. 

Felix O'Regan said banks are taking as pragmatic approach as is reasonably possible.

Speaking on RTÉ's News at One, Mr O'Regan said SMEs are important for the economy and to the banking sector because if the banks do not lend and support that sector they themselves are in trouble.

"What the banks are doing is looking at each of these cases and trying to take a pragmatic approach as can reasonably be taken in the circumstances and you're looking at the welfare of the business and the people employed there but you're also looking at the risk profile and you're looking at the prospects of that business being able to trade its way through in some shape or form."

Mr O'Regan said over the past ten days the leading banks have published their annual results.

He said in every case they have been saying, to one degree or another, the great extent to which they have made progress in addressing the SME distressed book.

"The banks are providing quarterly reports into the Central Bank in terms of the progress that it is being made and in fact the leading banks have said that by the end of this year they expect to have put end of stage solutions in place for the vast bulk of the SME books."

Meanwhile, the co-founder of New Beginnings, a group that campaigns for homeowners struggling with debt, has said those involved in small and medium businesses have borne a huge amount of the brunt of the economic collapse.

Ross Maguire said the banks are simply not willing to engage with SME debt.

He said that many of those in the SME sector were advised to invest in property as a pension and those loans were now crippling them.

Mr Maguire said if the debt burden was lifted off the SMEs, that businesses across the country would spring back to life.

He added that structured debt write down was the only solution and that if small businesses could get going again that could only be good for the economy and for banks.

"The truth is if the debt burden was lifted off these SMEs, it's a bit like a plastic sheet over a garden, if you lift if off the growth will spring back to life.

"And we can play around with debt forever but until it's lifted off small and medium sized businesses, and that really means the butcher, the baker, the candle stick maker, it's at the very small level especially there won't be growth."