Funding for lending scheme ‘boosts housing market rather than businesses’

A key scheme to encourage banks to ramp up their lending has added fuel to the housing market but has so far failed to ignite lending to small businesses, according to the latest data from the Bank of England, reports The Guardian.

Almost £4bn of lending was removed from businesses in the three months to the end of November but mortgage approvals were higher than the previous three months – although they are still running at half the pre-credit crunch levels of 2007.

The data for the three months to the end of November follows the launch of the funding for lending scheme, run by the Bank of England, in August which allows financial institutions to borrow at a low interest rate.

Lord Oakeshott, who resigned as Lib Dem Treasury spokesman in the Lords in protest at the Project Merlin lending deal with the banks two years ago, called for the government to set net lending targets for the bailed-out banks Royal Bank of Scotland and Lloyds Banking Group. Net lending targets take account of loans being repaid not just new ones granted.

“If they can’t lend they must be recapitalised or nationalised. Failing banks are strangling Britain’s recovery – it’s as simple as that,” said Oakeshott.

On Friday GDP data could show the economy contracted in the last three months of 2012, after a near 1% rise in the third quarter. The UK will enter an exceptional triple-dip recession if the economy also contracts in the first quarter of 2013.

The Bank of England data showed mortgage approvals were rising, reaching 55,000 in November 2012, which economists said was the result of the funding for lending scheme, although the levels are only back to where they were a year ago.

The Council for Mortgage Lending is forecasting a near 10% rise in lending for 2013 to £156bn, from £143bn last year. If the CML forecasts prove correct, lending will be at its highest levels since 2008. Bob Fennell, chief economist at the CML, cited the funding for lending scheme as a “key reason” for the more positive outlook.

Lending to business was negative despite the scheme as loans are repaid in greater volume than new ones are granted. While £4bn was extracted from lending to businesses in the three months, £2.8bn of this contraction took place in November.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “It is a little worrying to see that smaller companies seem likely to see the least improvement in credit available and only stable spreads on lending rates going forward. The implication is that banks remain very cautious about lending to smaller businesses in the current difficult and uncertain environment.”

The Bank of England’s network of agents around the country reported that small businesses were paying off debt “as quickly as possible” but said some major lenders were expecting to increase their lending “slightly” in 2013.

Lloyds Banking Group insisted it was increasing lending to small business. David Oldfield, a director at Lloyds, said: “We have pledged to continue delivering positive net lending in 2013.”

There were calls for the government to accelerate its plans for a £1bn business bank. “The British business bank must be put into action without delay to ensure government support is visible and reaching businesses that need it most,” said Matthew Fell, director for competitive markets at employers’ body the CBI.

The shadow business secretary, Chuka Umunna, accused ministers of “dragging their feet” over the business bank. The failure of the government’s Project Merlin and credit easing schemes mean businesses desperately need the funding, for a lending scheme to make a difference, Umunna added.

Oakeshott calculated that “banks have sucked £7bn net out of small- and medium-sized business since they conned the Treasury into the disgraceful Project Merlin deal two years ago”.

The business secretary, Vince Cable, has appointed former Bank of Scotland chief executive Sir Peter Burt to chair the business bank and has named five members for its advisory panel, including Lady Wheatcroft and former general secretary of the TUC, Brendan Barber.

“The business bank is on schedule and these appointments take it one step closer towards delivering more long-term funding for small and medium enterprise,” said Cable.