The real SME lending story isn’t so gloomy as bank balances are actually growing

City workers in Canary Wharf could soon be treated to lush green public spaces on the doorstep of their offices.

Despite the lingering economic gloom and low interest rates, many of them are building up cash mountains. The sector is amassing deposits in banks at a rapid rate, and the smaller businesses are building them up fastest.

The latest figures show that, at the end of March, SMEs had £125.9bn on deposit, up from £119.2bn a year earlier – an increase of 5.6 per cent. Smaller businesses have built up their deposits even faster: a 7.8 per cent increase from £56.1bn to £60.5bn over the same period.

The question is whether this is good or bad? In one sense, this is clearly a sign of success. For many small firms, these are genuinely tough times. But the sector as a whole is generating the cash that enables them to save. Companies on the verge of bankruptcy or with cashflow crises don’t generally have big deposits.

But it is also a sign of fear and uncertainty. Many are choosing to hold their spare cash in the bank, rather than invest it in expanding their business, because they are worried about the future. Just like big businesses and households, they are responding to economic gloom by saving up and paying off debts. Personal saving is also rocketing, and people are paying off their mortgages. From their own personal financial point of view, that is no doubt a good thing to do.

One of the consequences, however, is depressed net lending figures. When a person or company pays off a debt – whether a mortgage or a business loan – it reduces net lending figures. Net mortgage lending is down not so much because the amount of new mortgages being taken out has declined, but because capital repayments have been rising. When individuals or companies build up their savings, they are also less likely to take out a loan. When they need money they are more likely to turn to their own reserves, rather than a bank.

So what matters to borrowers is not so much net lending, but whether they are able to access finance when they need it. People paying off their mortgages reduces net mortgage lending figures, but that does not mean first-time buyers are finding it more difficult to get a mortgage to buy their dream home. Likewise, a highly-indebted business may want to reduce its costs by paying off loans, which will reduce net lending figures. But this has no impact on whether other companies that need finance can get access to it.

Availability to finance is better measured by gross lending, where the picture is very different from the declining net lending. Gross lending is stable, with around £40bn new lending going out of the doors of banks and building societies every month. The latest figures show that, in March, gross lending to SMEs by banks rose to £3.9bn, the highest level for well over a year. It is gross lending that matters to SMEs, not whether other SMEs are paying off debts. Banks are doing more to improve access to loans and overdrafts – many of the criticisms were justified. But when it comes to SME finances, it is not all bad news.