Banks reduce loans to small business, in spite of Funding for Lending scheme pledge

The scheme, which began in August last year, was designed to encourage banks to lend more money, both to individuals and businesses.

But the Bank of England has announced that net lending fell by more than £2.4bn in the final quarter of last year.

However, UK banks have taken up nearly £14bn since the scheme started.

Lloyds was amongst the banks that lent less, while Barclays lent more.

“Some banks are reducing parts of their lending activities, consistent with the continued adjustment of their business models in the wake of the financial crisis, or responding to state aid conditions,” said the Bank.

But the Bank said that Funding for Lending should encourage banks to cut their lending by less than they otherwise would have done.

“FLS should encourage those banks that were planning to reduce their lending to households and companies in aggregate to expand their core lending such that the total is cut back by less than would otherwise have been the case,” it said.

In total, £80bn is being made available to banks at reduced interest rates, but only if they guarantee to lend that money on to Britain’s small and medium-sized businesses, as well as individuals.

Several lenders have cut rates
But lending to businesses has shown little sign of revival, with the industry saying it will take longer for FLS to feed through into business loans.

Last week, the Bank’s deputy governor, Paul Tucker, admitted that the majority of loans funded by FLS had gone to homebuyers rather than small and medium-sized businesses.

Speaking to MPs on the Treasury Select Committee, he hinted that the Bank was considering “extraordinary” policies to encourage more business lending, including the idea of charging High Street banks a negative interest rate.

This would encourage banks to lend cash to small firms, rather than deposit it with the Bank of England, which would cost them money.

It is being claimed that banks are increasingly reluctant to lend to retail businesses, causing some to close

Commenting on the announcement, Dr Adam Marshall, Director of Policy and External Affairs at the British Chambers of Commerce (BCC) said: “Although the fourth quarter is typically a subdued period for lending, the latest update is clearly disappointing, with net lending contracting in the final three months of 2012. The real test for the FLS has always been whether the funding reaches fast-growing and new firms, and unfortunately the latest Bank of England Credit Conditions Survey confirmed that small firms continue to be left out in the cold.”

“Against this backdrop, it is clear that the journey of the Business Bank from the drawing board to the real world must begin in earnest, as this would be a game changer for young companies looking to expand and drive the recovery.”

Christopher Shaw, CEO of the alternative finance provider Platform Black, went one further saying: “These “warts and all” figures make a mockery of most of the big banks’ claims about being willing to lend.

“Total net lending by banks and building societies taking part in the scheme – which includes all major British lenders apart from HSBC – is now down by £1.5bn since June 30.

“And behind these figures there is a growing split in the sorts of loans being offered.

“The FLS’s aim is to boost lending to both households and businesses, but for the banks it’s clearly still a case of all borrowers being equal, but some being more equal than others. Somehow the banks’ lending criteria have morphed into “mortgage lending good, business lending bad”.

“So while mortgage lending is improving, on the business front line things are going from bad to worse.

“Despite their greater access to funds, the high street banks’ risk aversion has become endemic, and most won’t consider lending to a business without significant assets and security. In many cases, even when companies are offered a loan, the terms can be so prohibitive that they are just not practical and this is inhibiting business growth and limiting the wider economy’s ability to recover”

“The Funding for Lending scheme is a fine idea in principle – but for now it is little more than that.

“The banks’ continued unwillingness – or inability – to lend to businesses has led ever more companies to seek funds from alternative finance providers. The banks still have a vital role to play oiling the wheels of British business, but their monopoly on lending is gone for good.”