Bank lending falls despite 'Project Merlin' agreement

Lending by Britain's top five banks shrank every quarter last year, official figures revealed today, in an embarrassing blow to the Chancellor's Project Merlin agreement.

After taking loan repayments into account, the five - Lloyds Banking Group, Royal Bank of Scotland, Santander, Barclays and HSBC - saw combined net lending slide in 2011, the Bank of England said, including a 3% drop in the final quarter.

The figures also confirmed that the five banks missed gross lending targets for small businesses in 2011 by more than £1 billion but beat the target for all businesses by £24.9 billion.

Royal Bank of Scotland, which is 83% owned by the taxpayer, is the culprit for the shortfall in small business lending after the other four lenders came forward and confirmed they had beaten their targets.

Under the Project Merlin agreement, Britain's top five banks said they would increase lending available to SMEs to £76 billion this year and boost lending available to all businesses to £190 billion.

The British Bankers' Association (BBA) said the overall lending figure demonstrated the banks' commitment to help UK businesses and pointed to Bank of England data that showed SMEs' demand for credit had fallen in three out of the last four quarters

A spokesman for the Merlin banks said: "The banks' efforts to encourage customers to come forward with borrowing proposals are set against this overall challenging economic environment. The business demand for credit remains weak."

Chancellor George Osborne is likely to face questions over whether any penalties will be put in place for the banks' failure to hit the SME targets.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said SMEs continue to be frustrated by the cost and terms and conditions around lending.

Ms Hopley said "a lack of competing sources of finance outside of banks remain part of the problem" and added: "The challenge for 2012 is how to offset the forces dampening demand for finance by improving the conditions of supply."

The Project Merlin agreement will not be repeated this year - although the Government plans to launch its credit easing programme, which will initially see £20 billion made available over the next two years under a National Loan Guarantee Scheme.

The National Loan Guarantee Scheme will issue new low-interest loans and overdrafts to businesses with a turnover of less than £50 million.

Following a leak of the figures last Friday, Mark Hoban, Financial Secretary to the Treasury, said: "Ensuring that businesses can access the credit they need to grow and create jobs is vital, which is why the Government is now making up to £21 billion of guarantees available through credit easing.

"But banks need to play their part by continuing to support British business going forward."

RBS chief executive Stephen Hester defended his bank's performance, pointing out that its lending will not be far short of all the other banks combined.

He said: "There is no bank in this country coming close to punching above their weight in the way we are. Forget Project Merlin and how it's defined - that's damn impressive. People have lost sight of that."

Barclays said it exceeded targets by 13% last year, after it handed out £43.6 billion of new lending to businesses, including £14.7 billion to SMEs.

Chief executive Bob Diamond said he was "proud" of the performance as the bank claimed to have supported 108,000 start-ups and returned 1,900 existing businesses to health.

Part-nationalised rival Lloyds Banking Group also beat its target after lending £12.5 billion to SMEs, compared with its £11.7 billion benchmark.

Santander UK lent £8.7 billion to businesses in 2011, a 25% increase on the previous year and exceeding its target of £6.7 billion. Of this, £4.3 billion went to smaller firms - £300 million more than its target.

PA