The Central Bank does not know how many SME loans have been sold on to so called ‘vulture funds’ according to a Dáil reply received by Fianna Fáil Spokesperson on Finance Michael McGrath.
Deputy McGrath commented, ‘We know that a very significant number of SME business loans have been sold on by banks, the IBRC Special Liquidator and NAMA in recent years and these have generally been bought by private equity funds or so called ‘vulture funds’. While the original loan agreement does remain unchanged when a loan is sold, the dynamic of the lender-borrower relationship changes when the loan is owned by a fund as opposed to a bank. Typically, these funds adopt a shorter time horizon when making decisions and may well be more inclined to move on the borrower in order to get control of the business or the underlying assets.
“A typical SME loan agreement is stacked so heavily in favour of the lender that, in many cases, it is relatively easy for the loan owner to trigger a default and call in the loan. This can result in the collapse of a going concern business and the loss of many jobs as a result. On top of this, the fact that the funds themselves are typically not regulated in Ireland means there is no direct contact between them and the borrower. Instead, the contact is between the borrower and an appointed regulated credit servicing firm which is not making the ultimate decisions on the future of the loan.
“It is incredible that the Central Bank has no record of the number of business loans that have been sold on to ‘vulture funds’. This information gap is a source of real concern and makes it difficult to trace the impact of the sale of loan portfolios in this way. Further, the loans may well be sold on again by the funds themselves and the Central Bank will have no knowledge of where they end up. An SME could find that its loans have been bought by pretty much anyone who merely has to appoint a credit servicing firm to comply with the existing law.
“It is vital the Central Bank collates this information so we can measure the outcomes when loans are sold in this way. We need a register of the owners of all SME loans in Ireland and we need legislation to require these funds to be fully regulated by the Central Bank. Otherwise Irish SMEs are exposed to unnecessary risk and the distinct possibility their loans could get sold on again and again as time goes on.”