Bank stimulus scheme 'must help businesses'

City Editor

Saturday 14 July 2012

BUSINESS leaders have warned that the success of the Government's much-heralded new £80 billion scheme to boost bank lending will depend on the willingness of institutions to provide funds to more companies.

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TIM SHARP CITY EDITOR

Banks are being offered funding at low interest rates over a four-year period in the hope that it spurs them to lend more.

The price will depend on each bank's net lending between June 30, 2012 and the end of 2013.

Banks that maintain or expand their lending will pay a fee of 0.25% of the amount borrowed plus the Bank Rate, which is currently 0.5%.Those that cut lending will see their fee increased to as much as 1.5%.Colin Borland, the Federation of Small Businesses' head of external affairs in Scotland, said: "To be truly successful this initiative needs to do more than simply lend extra money at a lower rate to those who would have secured finance anyway."He warned that four in 10 small businesses that seek bank funding are rejected."This suggests that there remains a problem around to whom high street banks are willing to lend, and that is a problem which any stimulus scheme needs to take into account." The Bank of England will lend UK Treasury Bills to banks and building societies for up to four years.In return banks will put up as collateral existing loans to individuals and businesses.With current funding priced at between 3% and 5%, the scheme should cut lending costs for banks.Funding costs have risen since last summer as the eurozone crisis rumbled on.The Bank of England estimates this has pushed loan rates up 50 basis points.A spokesman for the British Bankers' Association said: "This new 'funding for lending' scheme should help insulate new borrowers against the worst effects of the eurozone crisis."John Cridland, the director-general of the Confederation of British Industry, said: "This new scheme should provide a real incentive for banks and building societies to increase their lending to businesses and individuals, if possible at lower rates of interest."Phillip Monks, chief executive of Aldermore, a bank that is attempting to take on the might of established high street names in small business lending, said the Government should ensure smaller challenger banks benefit from the scheme."Not only will this help encourage more lending to British businesses, but it has the positive effect of more banking competition – something that is desperately needed," he said.Gerard Lane, investment strategist at Shore Captial Stockbrokers, said there will be fears that banks will use the scheme to boost profits."We would welcome 'behind the scenes' moves to address these fears, and explicitly seek the policymakers to address the shortage of capital access in those areas of the economy that have high levels of labour productivity, as opposed to real estate which appears to us as an addiction of the past decade," he added.Banks can borrow up to 5% of their existing lending stock, which will be increased if they expand net lending.The Bank will publish a bank-by-bank breakdown of lending each quarter.

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Bank stimulus scheme 'must help businesses'

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