German Companies Facing Difficulty in Obtaining Loans: Ifo Institute

German companies are finding it more difficult to get loans. According to the Ifo Institute, almost one in three companies reported banks’ reluctance in September. Monetary policy is apparently having an effect.

Given higher interest rates and the weak economy, companies in Germany are currently having a much harder time accessing new bank loans. 29.2 percent of the companies that are currently negotiating loans reported reluctance on the part of financial institutions in September, as the Munich ifo Institute announced today in its quarterly survey. In June only 21.3 percent of companies complained about this.

Since the survey began using the current methodology in 2017, the credit hurdle has only been higher once – in December 2022, when the value was 30 percent. “The banks are gradually increasing loan interest rates and are becoming more cautious about lending,” said the head of the ifo surveys, Klaus Wohlrabe, summarizing the results.

Key interest rate increased at record pace

The European Central Bank (ECB) has increased its key interest rate from zero to currently 4.50 percent at a record pace since summer 2022 in order to push the high inflation rate back towards its target value of two percent. When interest rates rise and banks pass on their higher costs, demand and lending typically fall – which in turn slows economic activity and curbs price increases.

According to the state development bank KfW, an average of more than five percent interest was recently due on corporate loans. The weak economy could also cause banks to take a closer look. “In economically weaker phases, companies also have to contribute more to securing loans,” says Wohlrabe.

The number of company bankruptcies rose by 37.4 percent in July compared to the same month last year to 1,586, as determined by the Federal Statistical Office. In the event of insolvency, banks are usually left with claims and are therefore hesitant to approve new funds in difficult economic times.

Things are becoming more difficult, especially for service providers

The credit hurdle has become higher, especially for service providers: 31.5 percent complained about more difficult access, after 21.8 percent in June. In industry, the share rose from 20.7 to 27.7 percent. Among manufacturers of electrical equipment, almost 40 percent of companies now report that banks are reluctant. In mechanical engineering the share is 31.6 percent.

Given the difficult situation in housing construction, banks are also cautious about companies in the real estate and housing sector (31 percent). In the events industry the proportion is around 35 percent. In retail it rose noticeably, from 20.5 to 28.2 percent. “The economic situation of many retailers remains difficult due to the reluctance to buy,” it said. This is also reflected in the conditions for granting loans.

The same applies to the construction industry, where 29.4 percent reported restrictive lending – after 26.9 percent in June. Only in wholesale there was a decline from 22.6 to 20.2 percent.