Slow start to loan scheme as banks snub cheap funds

The Government's flagship Funding for Lending Scheme (FLS), designed to boost the sickly economy, has got off to an underwhelming start.

The Bank of England revealed yesterday that just six out of the 35 lenders who signed up to the scheme have so far accessed any cheap funding. Total lending to the economy has grown by only £496m while the FLS has been in operation.

Four banks – Barclays, Lloyds, the Royal Bank of Scotland (RBS) and Santander – drew down a combined total of £3.75bn worth of cheap funding under the FLS, which was launched in August. Two building societies, Nationwide and Leeds, also drew down £610m. But while net lending by Barclays, Nationwide and Leeds grew over the three months of the scheme, the loan books of the RBS, Santander and Lloyds shrank.

The £4.36bn of total funding accessed so far by lenders represents about 7 per cent of the total available to them. The fact that the sector's aggregate loan book has grown at all can be interpreted as a success given that in July the Bank of England judged that total UK lending was more likely to decline rather than increase over the next 18 months.

But while there have been signs of some easing of the availability of mortgages in recent months, small firms said they are not benefiting from the FLS.

"The scheme was designed to help businesses as well as homeowners, but evidence points to this helping the mortgage market more, perhaps due to the larger number of providers in this market," said John Walker of the Federation of Small Businesses.

The total stock of loans to UK borrowers from RBS shrank by £642m over the three months of the scheme's operation, despite the bailed-out lender accessing £750m in funding. And the lending books of Lloyds contracted by £2.77bn. The Spanish-owned Santander drew down £1bn in state funding, but shrank its lending by £3.5bn. Though Barclays also drew down £1bn of guarantees, its stock of lending expanded by £3.8bn.

The Funding for Lending Scheme offers banks cheap finance to lend to others, and is aimed to boost the economy in ways that the Bank of England's £375bn of quantitative easing bond purchases has failed to.