Ministers should put the UK�s banks in an armlock and force them to boost lending to firms or run the risk of the country suffering massive damage to its economic base, according to business leaders.
MINISTERS should put the UK's banks in an armlock and force them to boost lending to firms or run the risk of the country suffering massive damage to its economic base, according to business leaders.
Peter Hughes, chief executive of Scottish Engineering, said the UK government needed to take drastic action to help tackle a shortage of credit which is hammering businesses across the country.
With firms struggling to raise money on affordable terms, champions of smaller enterprises note that many face going out of business. Others have been threatening to shelve vital investment - a development that could seriously weaken their international competitiveness.
Hughes was furious that while the taxpayer has provided billions of pounds to prop up leading banks in recent months, and the Bank of England has slashed base rates to just 2%, the country's firms appeared to be still waiting to see any benefit.
On Friday the Bank of England warned that credit conditions faced by businesses would get tougher in the current quarter. Research for the latest business monitor for Lloyds TSB bank showed firms expected debt to become harder to obtain and the cost of credit to increase in the first quarter.
While the Confederation of British Industry said last week that the government needed to provide more help for banks, Hughes blamed lenders for the problems faced by firms.
"It's the banks that need to do more, not the government. It's the government that's bailed them out, it needs to use its influence with the banks to say get your fingers out and do something about it (credit)," said Hughes.
"They (ministers) have got to get an armlock on the banks, saying if you don't do this we will put someone on your board, we will order you what to do."
Hughes said the shortage of credit was causing serious problems across the key engineering sector. For example, one profitable firm which employed 200 people was told it would have to pay interest at 7% on its overdraft this year, up from around 3% in 2008. The firm had been complying with an agreement to reduce its overdraft.
"That's scandalous, absolutely scandalous," said Hughes.
The critical view was echoed by the Federation of Small Businesses.
Colin Borland, spokesman for the FSB in Scotland, said recent surveys indicated members had found that it became harder to obtain credit in December than in October, despite commitments by some banks to maintain lending at 2007 levels.
"The figures suggest warm words are not being translated into action on the high streets," said Borland.
The FSB was concerned that perfectly good businesses were being refused loans and overdrafts. Those that got credit were having to pay high interest rates combined with swingeing charges.
The owner of one delivery business recently told The Herald that his bank wanted to charge him interest at 5.75 percentage points over the base rate and levy a £2000 arrangement fee to extend his firm's overdraft.
Borland said ministers should take advantage of the fact that the taxpayer now owns 58% of Royal Bank and is in line to take a significant stake in HBOS and Lloyds TSB if the two banks combine as planned.
"The fact that we own the banks means using our influence to get them to make good on what they said they would do. They need to realise they can't continue to behave as it suits them. It can't be solely down to the government and the taxpayer; we now need to start seeing a bit of a return on that investment."
However, Garry Clark, head of policy and public affairs at Scottish Chambers of Commerce, did not believe the picture was so clear-cut.
"It is difficult to attach blame. Banks have been undergoing a very difficult time," said Clark.
"We have been supportive of what the government has tried to do in banking, the injection of liquidity has been absolutely necessary and we support that. It is important to recognise that banks may need further assistance and the government may need to be ready to do that."
Some believe the fact that the government had subscribed for preference shares in Royal Bank that paid 12%, meant the bank had too high a cost of capital to be able to lend at rates that firms could afford.
However, the rates that banks charge to borrow from each other in wholesale markets are much lower. The London Interbank Offered Rate for one-year deposits was 2.97% yesterday.
Alf Young Page 27
