Why Are Companies In Germany Finding It More Difficult To Get Loans?

(RTTNews) - As banks raise interest rates and tighten the credit standards for loans, the number of German companies finding it more difficult to obtain loans are rising in an economy that is likely to undergo a mild recession this year, an ifo Institute survey showed Thursday. The share of companies in ongoing credit negotiations, who reported restraint on the part of banks, climbed to 29.9 percent in December from 24.3 percent in September, the survey found. "Banks are gradually increasing interest rates on loans and are more reluctant to grant them," Klaus Wohlrabe, head of surveys at ifo, said. "The era of low interest rates is over for now."

That means, many companies will have to get used to this and adjust how they structure their financing accordingly, Wohlrabe added.

Eurozone banks are turning increasingly cautious due to their shrinking risk tolerance and also the intensifying fears of a recession. That said, with signs of a modest let up in sky high energy prices, thus some slowing in uncomfortably high inflation, the picture seems to have brightened somewhat.

This week, Goldman Sachs said in a note that the euro area is no longer expected to have a technical recession this year, but will experience weak growth over the winter months given the energy crisis. The firm had earlier forecast a 0.1 percent contraction in the Eurozone for this year.

According to the ifo survey, the worst hit were the service providers, 34.6 percent of them said that banks were being more restrictive. The hospitality sector took most of the brunt with 67.7 percent of firms seeking loans reporting difficulties.

In manufacturing, the share of firms reporting bank restraint was 28 percent, while in retail it was just under 21 percent.

Microenterprises and the self-employed continue to be the most affected, ifo said, with almost one in two service providers in this segment reporting problems obtaining loans. Further, a number of self employed people in the biggest euro area economy were finding the current situation hard. "Since bank loans are still among the most important financial instruments for the self-employed, the situation is making matters worse for many of them," Wohlrabe added.

The European Central Bank's bank lending survey for the third quarter had shown that euro area banks expected a stronger net tightening for credit standards on loans to firms in the fourth quarter, both for loans to small and medium enterprises, or SMEs, and large enterprises. The ECB survey also showed that banks reported the share of rejected loan applications increased in Germany and Spain, among the big four, driven by an increase in the share of rejected applications both for SMEs and large firms.