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

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

Merlin

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.

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
PROMOTED VIDEO
News
i100
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
News
First woman: Valentina Tereshkova
peopleNASA guinea pig Kate Greene thinks it might fly
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and that no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Parties threaten resort's image as a family destination

Life and Style
Northern soul mecca the Wigan Casino
fashionGone are the punks, casuals, new romantics, ravers, skaters, crusties. Now all kids look the same
Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Salisbury ranked seventh in world’s best tourist cities

The city is home to one of the four surviving copies of the Magna Carta, along with the world’s oldest mechanical clock
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album