Bank extends lending scheme to tackle credit crunch

The Bank of England and the Treasury today announced an extension to their Funding for Lending Scheme.

The move reflects growing concern over the ongoing credit crunch afflicting small businesses.

The FLS, established last August to provide banks with cheap funding on the condition they pass on the money to hard-pressed small businesses and households, will be made more generous to lenders and prolonged for another year.

Barclays’ chief executive Antony Jenkins described the FLS extension as “helpful” but other banking executives have played down expectations that the scheme will have a dramatic impact, claiming most small businesses do not want to borrow in the present economic climate.

Banks can claim the subsidy if they pass on the funds to non-bank credit providers. Direct lending to small and medium-sized enterprises (SMES) will attract a larger funding benefit. From 2014 banks will be able to draw down £5 (up from £1) of cheap loans for every £1 in net new lending to SMEs. And to ensure lenders do not put off expanding their loan books until that point, the incentive for the rest of 2013 will be increased to £10 for every £1 of new SME lending. The £80 billion FLS, which was originally due to close in January 2014, will now continue until early 2015.

Over the first five months of the FLS’ life, banks drew down £13.8 billion but their aggregate loan banks contracted by £1.5 billion.

Underlining the squeeze, the British Bankers Association today said net lending to businesses fell by £700 million in March. This followed a £1.9 billion contraction in February.

However, Bank Governor, Sir Mervyn King, pictured, argued that the scheme had led to a reduction in banks’ funding costs, and had resulted in more lending than would have taken place in its absence. He said the extended programme would “build on that success”.