Business chiefs dispute claims of rise in credit to companies

Lenders claim they increased the availability of credit to companies in the three months to June and forecast a further rise, in a Bank of England survey published yesterday, but economists and business leaders are sceptical.

The British Chambers of Commerce said it was "particularly concerning" that lending to businesses had not risen by as much as expected in the latest quarter. It voiced fears that the banks could prolong the economic downturn if they did not start "lending effectively".

Availability of credit, for both corporates and households, is viewed widely as absolutely crucial to a sustained UK economic recovery.

The Bank of England and government have put in place huge measures as they strive to stimulate lending and kick-start recovery. A gigantic support package has been put in place for the UK banking sector. The Bank of England has slashed UK base rates to a record low of 0.5% and is boosting UK money supply by £125bn through "quantitative easing".

While the Bank of England's latest quarterly survey of credit conditions provides some encouragement, with banks and building societies having until recently been reporting sharp declines in credit availability, it does not point to a significant rate of increase in lending.

It also paints a different picture to actual lending data. Bank of England data this week showed that lending to non-financial companies slid further in May, and high-lighted continuing weakness in mortgage lending.

Vicky Redwood, UK economist at Capital Economics, said: "While lenders may be saying that they intend to make more credit available, there have been few signs yet that they are actually doing so.

"Lending spreads have been increasing, deposit requirements on new mortgages remain high and lending growth itself has actually been slowing."

In the Bank of England's latest credit conditions survey, a net 14.3% of lenders said the availability of credit to the corporate sector had increased in the three months to mid-June. This was up from a balance of 7.8% of lenders reporting in March that availability of corporate credit had risen in the opening three months of this year.

These two consecutive positive balances follow six straight quarters for which lenders reported a decline in the availability of credit for companies.

These previous declines in corporate credit availability were generally much steeper than the rises now being signalled.

And the net balance reporting a rise in credit availability for corporates in the three months to mid-June was much smaller than that which had predicted such an increase during this period in the previous quarterly survey.

In the March survey, a balance of 26.3% of lenders had forecast a rise in corporate credit availability during the three months to June.

David Frost, director-general of the British Chambers of Commerce, said of the smaller-than-expected increase: "This is particularly concerning news, considering the pivotal role businesses will play in driving the UK out of recession.

"If the banks do not grasp the nettle and start lending effectively to the private sector, they will simply be playing a part in prolonging this downturn. Banks have a responsibility not just to lend, but to lend to the wealth-creating sectors of the economy."

Redwood highlighted her belief that the improvement in the corporate credit availability balances "may just have reflected the lending commitments made by those lenders participating in the UK government's asset protection scheme, rather than a fundamental shift in lenders' risk appetite".

Lloyds Banking Group, formed by Lloyds TSB's rescue takeover of HBOS, and Royal Bank of Scotland made lending commitments in return for their entry to the asset protection scheme, which effectively allows them to take out insurance against risky assets.

Redwood said: "Our worry is that the lending commitments add up to around only one-quarter of the rise in lending that is actually needed to ensure that the economy grows at its potential rate."

The Bank of England survey, conducted between May 26 and June 12, states that corporate credit availability is expected to increase further "particularly by lenders who have made lending commitments as part of the APS".

The survey also shows a small increase in the availability of mortgage lending to households in the three months to mid-June. A net 9.7% of lenders reported an increase in availability of secured credit to households in the three months to mid-June.

This was the first positive balance since the third quarter of 2007, and a further small increase in home-loan availability is forecast by lenders in the coming three months.

In contrast, the availability to households of unsecured credit, which takes in personal loans, credit card lending and overdrafts, declined further in the three months to mid-June. A further fall is projected.

Lenders reported that default on loans to both households and non-financial companies, and associated losses, increased during the three months to mid-June and they predicted a further rise.

And, consistent with this developing bad debt picture and signs that banks and building societies are attempting to rebuild their balance sheets by charging greater margins, interest-rate spreads on lending to households and companies widened during the three months to mid-June.

Survey respondents cited improved cost and availability of the funds which they require to lend on, in explaining the increase in availability of home loans and corporate credit.

However, the survey shows a tightening of covenants on loans to private non-financial corporations and a slight increase in collateral requirements.

Howard Archer, chief UK economist at consultancy IHS Global Insight, took a more upbeat view of the credit conditions survey than Redwood.

He said: "The Bank of England survey, encouragingly, indicates that credit conditions may finally be beginning to improve. In particular, the survey reveals that the availability of credit to corporates had increased over the second quarter of 2009 for a second successive quarter and at an increased rate.

"Significantly, the survey revealed that increased credit availability is now being lifted by improvements in the cost and availability of funds. It also indicated that concerns over the economic outlook had had a reduced depressing impact on credit availability in the second quarter."

Archer added: "While latest hard data still indicates muted lending to corporates and households, the Bank of England survey boosts hopes that the various policy measures undertaken by both the central bank and the government to boost bank lending -including quantitative easing - are starting to feed through to have a beneficial impact.

"Consequently, the survey raises hopes that credit conditions will increasingly become less of a constraint on economic activity over the coming months. This is critical to recovery prospects."