The Minister for Finance has said the Central Bank should investigate claims made by economist Morgan Kelly. The UCD academic says a stress test by the European Central Bank (ECB) of Irish banks could see many smaller firms cut loose and forced to shut down.

Professor Kelly famously predicted the scale of the crisis in the property and banking sectors.

He says the ECB planned inspections of Irish banks will uncover massive debt issues in small firms here.

He says the action against distressed loans could be "very, very horrible" and a huge chunk of the economy could be wiped out in one go.

Minister Noonan says the two major banks have already restructured most of their loans to SMEs and he does not expect any problem.

But he thinks it would be a good idea for the Central Bank to go through the claims of Professor Kelly.

The SME sector earlier downplayed the fears of Professor Kelly, saying that that ECB actions will not be as severe as Professor Kelly fears.

Banks have said calling in those loans will not be as difficult as repossessing a family home, because there is no emotion attached.

ISME says the banks have prepared for a certain level of debt forgiveness, and have become skilled at splitting out bad loans from good.

The group is reminding banks that they were bailed out and that business activity in Ireland should be protected.

Decreased lending

It comes as a new survey from ISME shows an increase in the number of small businesses being turned down for a loan by their bank.

Half of all firms could not get funding at the end of last year - a rise of 4% on the previous quarter. Almost two-thirds reported a hike in bank charges.

At the same time the figures reveal that more SMEs are looking for loans than before, with numbers applying up from 37% to 39%.