Mixed messages about lending

Wednesday 1 August 2012

IN his keynote speech at the Conservative Party Conference last autumn George Osborne announced a new scheme with his customary flourish: "The Government promised to help small businesses get access to lower interest rates.

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Today we deliver on that promise with a nationwide scheme." The credit-easing programme was called the National Loan Guarantee Scheme (NLGS), an idea later fleshed out in the Chancellor's autumn statement, though it didn't finally get off the ground properly until March this year. Around £20bn would be fed into the banks to give small and medium-sized enterprises (SMEs) loans at a discounted rate.

Well, blink and you missed it because, as The Herald reports today, the scheme is being quietly sidelined. It was not popular with some of the banks. They complained about its structure and one, Santander UK, stopped using it for its business loans.This was not the Coalition's first attempt to get banks to lend to small firms. Business Secretary Vince Cable's Project Merlin placed voluntary lending targets on the banks but, though lending to large corporations held up, small firms were discouraged from borrowing by the interest rates and arrangement fees demanded by the banks. Despite a tangle of different projects and schemes, lending to small businesses continued to shrink. Since the autumn of 2008, business lending has fallen by 18%, according to Bank of England figures.Today another scheme is being rolled out. Funding-for-Lending is intended to provide up to £80bn to both business and households. The Treasury's line is expected to be that the new scheme renders NLGS surplus to requirements. The new scheme is certainly better designed to incentivise banks to lend: the more a bank lends, the lower the interest rate at which it can access funds from the Treasury. However, the distinguishing feature of the loan guarantee scheme was that it delivered a 1% discount on loans to SMEs. No such obligation is written into Funding-for-Lending. And the new scheme is open to everyone. The NLGS is not being formally axed, less than six months after it was launched, but Treasury officials have intimated that it will effectively be abandoned. Small businesses form the backbone of the British economy and are key to economic recovery. The bulk of public sector redundancies are still to come. If unemployment is not to start rising again sharply, taking with it all hopes of escaping recession, small businesses will need to be able to borrow, invest and take on labour. Will the banks once again find ways of pocketing the cheap funding and failing to pass it on to customers? That is certainly a risk. There is a second danger too: SMEs, shocked by the eurozone crisis and darkening global economy and frightened by alarmist early Coalition talk of a potential looming Greek-style sovereign debt crisis, will prefer to continue quietly sewing up the holes in their balance sheets, pay down debt and try to tough it out.So much for the Chancellor's promise to help small businesses secure lower interest rates on the loans required to expand and create the jobs the economy – and the country – so urgently need.

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Mixed messages about lending

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