Merlin fails to conjure up credit

Small companies are still finding it tough to get loans, despite the deal between banks and the Government. James Moore finds out why
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The Independent Online

Has Merlin lost its magic? The grandiosely titled deal between the Government and the banks set up by former Barclays chief executive John Varley last February was supposed to improve the supply of credit to businesses.

The big four banks – Barclays, HSBC, Royal Bank of Scotland and Lloyds – along with Spain's Banco Santander would show "a capacity and willingness to lend" by making borrowing facilities of £190bn available to businesses in 2011. Of that, £76bn would be specifically targeted at small and medium-sized enterprises (SMEs), which the Government hopes will be the engine of economic recovery.

But if credit is being made available, it isn't being taken up. Small business groups argue that in many cases it is simply unaffordable.

According to quarterly figures from the Bank of England, banks appear to have been as good as their word (just). With the final numbers due anytime, the first three quarters of 2011 showed £157.4bn was "made available", of which £56.1bn was for small businesses. So banks are on track to meet their targets, although they will have had to pull their fingers out on the small business side during the last three months of the year.

But there are other Bank of England figures that tell a very different story. Merlin only requires that borrowing facilities be offered to businesses. The Bank's "Trends In Lending" survey shows they are not being taken up. Just £77.3bn was actually borrowed by businesses in the first three quarters (there are no separate figures for SMEs).

What's more, lending net of repayments was negative £6.5bn – more money was paid back than lent out, and despite Merlin's aims, the supply of credit to businesses in Britain fell in the first three quarters of 2011. The full-year figures will also likely show a fall.

The Bank has an explanation for this. It has identified "a persistent tightening in the supply of credit" throughout the UK economy since 2007.

In its Credit Conditions Survey, covering the fourth quarter of 2011, the Bank also said: "Spreads on lending were reported to have widened in the past three months and were expected to widen... further in the coming quarter. Lenders commented that the pass-through of increased funding costs was among the factors driving the widening of spreads."

In other words, the cost of loans to businesses is rising. Credit might be available, but not at a cost many businesses can afford to pay.

Andrew Tyrie, the chairman of the Treasury Select Committee, is clear that banks can do more be altering their behaviour: "Banks are under pressure to strengthen their balance sheets but they could still lend more by reducing bonuses or dividends as the Bank of England has been pointing out. In the long run, as we have said in committee repeatedly, we must have more competition and choice for that crucial small business sector."

The Federation of Small Businesses (FSB) also says the picture is bleak. A spokeswoman argues Merlin hasn't changed much: "Those figures suggest it is big business that is getting the money. Many SMEs are telling us they still can't get credit. We want to see more alternative forms of financing made available."

The FSB says banks show little flexibility when customers need help: "We spoke to one businessman a few months ago who ended up using his own savings. The banks wouldn't let him go over his overdraft limit even for a day. If that's everyday life for small business it is not going to be conducive to growth in hard economic times.

"Back in the old days businesses used to be able to speak to the bank manager, who would know them. That needs to be restored."

The banks' more outspoken critics say the problem is obvious. Brendan Barber, the general secretary of the TUC says: "The Government set up Project Merlin last year in an attempt to distract attention from its failure to tackle the thorny issue of top pay and bonuses in the City. Now it's clear ... this was little more than a con."

He adds: "Firms are crying out for cash to help them invest and build for the future, but with the actual amount of credit lent by banks going down, the UK's economic recovery and a return to growth seems a very long way off."

The British Bankers Association won't comment directly on Merlin because it involves bilateral agreements with only five banks. But it insists the industry is doing its bit: "Banks have money to lend to businesses which want credit and can demonstrate the ability to make the repayments. Independent research shows that the limiting factor is not banks but concern about the economic situation: the overwhelming majority of businesses have not sought, and do not want, credit. Of the remainder most get their loan or overdraft."

Despite this, critics say it is not that Merlin has lost its magic – it never had any in the first place.

What those lending figures mean


Banks agree to make a certain amount of money available, either through lines of credit which businesses can draw on as required, or in the form of a loan offer. A bank could offer to extend up to £1bn of loans at 80 per cent for a year to any suitable business. No sane business would buy into that, but the £1bn counts towards the Merlin target.

Gross lending

Tots up all the money handed over by banks to businesses. If a company agrees a credit line of £500m, for example, but only draws on £100m, the £500m goes towards the Merlin target, but only the £100m counts towards the bank's gross lending.

Net lending

Net lending subtracts repayments and redemptions from a bank's gross lending. A positive number means it is lending more than has been paid back, increasing the supply of credit. A negative number means more money is being paid back than lent. Net lending figures have been negative for a while because, despite project Merlin, banks have been lending less.