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Banks cut SME loans despite taking £3bn in cheap funding

LENDING to small businesses has fallen again in the three months to the end of June, despite banks taking more money from a scheme offering them cheap cash to do so.

The Bank of England revealed that institutions cut their lending to small and medium enterprises (SMEs) by £435 million in the quarter, including repayments, following a net fall of £719m in the first three months of the year.

Lending to large corporations shrank by a net £3.47 billion, some of which was caused by a decline in commercial real estate loans.

The reduction comes as UK banks took an extra £3.2bn from the Funding for Lending scheme, the Bank of England's programme to provide money at cheap rates that can then be lent out to customers in the hope of lifting the economy.

The scheme was re-jigged in January to focus on loans to small firms, ending the use of Funding for Lending cash for mortgages amid concern that the influx of cheap money into home loans was overheating the property market.

"Despite the welcome re-focus towards SME lending, the real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses," said John Longworth, director general of the British Chambers of Commerce. "Unfortunately many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential."

The Bank of England said yesterday that overall corporate credit conditions are improving, once banks that are not participating in the new phase of Funding for Lending are included.

"Some of the weakness in bank lending to smaller businesses, which has persisted despite the fall in bank funding costs, may reflect weaker demand," it said.

The Royal Bank of Scotland, which did not withdraw any more money from the scheme in the last quarter, cut its lending by a net £1.5bn, including £360m from small business loans.

A spokesperson for the state-supported bank said the decline was less marked than it was at the start of the year. "We have proactively contacted over 290,000 UK SME customers to offer over £11.5bn new lending," they added.

Lloyds Banking Group took out £2bn from the scheme, and lent out a net £384m to small businesses. Overall, the firm took repayments worth £2bn more than the amount it lent out. Lloyds said it had pared back loans to large firms, which were instead turning to the bond markets as a source of cash.

"Through our participation in FLS we continue to offer one per cent discounts on loans to all our SME customers and that is helping us continue to grow our lending to the sector, by five per cent a year, net," the bank said.

Santander increased its business lending most of all the UK banks in the quarter, handing out a net £254m-worth of loans, including £99m to smaller firms. It borrowed an extra £500m from the Funding for Lending pot.

Meanwhile, Nationwide and Clydesdale cut lending by a net £364m and £439m respectively.

"The Bank of England will maintain that the scheme will take some time to have full effect, and we don't know what business lending would be shrinking by if the scheme were not in place," said Laith Khalaf, senior analyst at investment firm Hargreaves Lansdown.

"Lending demand may also be part of the problem. Perhaps so, but meantime savers are bearing the brunt of the pain in their deposit accounts and cash ISAs."

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