Banks set to miss 'Project Merlin' loan targets

The UK's top banks are on course to miss Project Merlin lending targets for small businesses, according to figures revealed by the Bank of England today.

Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander UK lent £16.8 billion to small and medium enterprises (SMEs) in the first three months of the year, the Bank said.

The banks agreed with the Government to increase lending to SMEs to £76 billion this year, which equates to £19 billion in the first quarter.

However, the figures showed the banks were on course to meet overall business lending targets of £190 billion this year, equal to £47.5 billion for the quarter, as they lent £47.3 billion in the period.

The Project Merlin agreement, unveiled in February, followed protracted talks between the top five banks and the Treasury over key issues such as bonuses and lending.

The figures are likely to provoke outrage as the banks have been accused of being unwilling to lend to credit-worthy small businesses as they continue to award high pay packages.

However, the banks are likely to defend their position by saying they only agreed to increase "lending capacity" and there is nothing they can do in the absence of demand for new borrowing.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said today's disappointing figures do not yet indicate an improvement in credit conditions for small companies.

Ms Hopley said: "While it is early days for the Merlin agreement, we have been sceptical about the degree to which this target-based approach would lead to a significant improvement in credit conditions for SMEs.

"Progress on the key issue of a lack of competition among the banks, as well as insufficient transparency in lending decisions and the lack of understanding of banks' customers, must now accelerate."

Santander is the only bank to have revealed its own lending commitments under the Project Merlin agreement - and is currently on track to hit its targets.

A Santander spokeswoman said: "We have pledged to lend £6.7 billion to British businesses this year, with £4 billion set aside for SMEs.

"During the first quarter we provided £2 billion of new lending, of which £1.1 billion was for SMEs, keeping us well on track to deliver this commitment."

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