Banks should have been forced to lend, says PAC

The Government should have done more to force taxpayer-owned banks to hit targets for lending to small business, the Public Accounts Committee (PAC) says today. Its report says the Treasury lacked effective sanctions against RBS and Lloyds when business lending fell short by £30bn.

Margaret Hodge, chair of the MPs' committee, said: "The Treasury appears to lack strong determination to use its influence to increase lending to small businesses. We expect it to find effective mechanisms to ensure the banks meet their lending commitments."

RBS had a target of £16bn of business lending in the 12 months to the end of February 2010 but received repayments of £6.2bn, meaning it missed its target by £22bn. Lloyds had a target of £11bn but only provided £3bn of lending to businesses, missing its target by £8bn.

A Lloyds TSB spokesman defended the bank: "We achieved net business lending growth in 2010, against a market where net lending fell," he said. "As a business we saw a sharp reduction in lending demand from businesses of all sizes and our lending targets were explicitly agreed with the Government to be subject to the availability of sufficient demand."

Andrew Cave, head of policy at the Federation of Small Businesses, criticised the targets. "The report tells us what we have known for some time: targets as a mechanism for boosting lending to small business are a toothless tiger," he said. "Close to 40 per cent of small businesses seeking finance are still being turned away. The only thing that will make a difference is the introduction of new competition to the marketplace."

Elsewhere, the report said RBS and Lloyds found it "difficult" to provide the Treasury with robust data on their assets. The PAC said: "It is alarming that two of the UK's major banks were simply unable to provide sufficient data to assure the Treasury that their assets were not linked to fraud or other criminal activity."

But RBS pointed out that because the Asset Protection Scheme covered more than 3.2 million individual assets, it was impossible to determine with complete certainty that none of the assets were at risk of having a connection with an illegal act. The bank said: "Since the date of accession we have not identified any assets that were the product of, or tainted by, criminal activity."

The committee noted that the level of taxpayer support for the two banks had decreased from nearly £1trillion to £512bn since the end of last year. But the Treasury now must face removing the support. "This will depend in particular on the success of the sale of the shares in RBS and Lloyds," said Ms Hodge. "The Treasury faces the challenge of balancing the taxpayers' interest on the public investment in the banks, with the wider imperative of maintaining financial stability."

Giving evidence to the committee in February, Sir Nicholas Macpherson, Permanent Secretary to the Treasury, said that selling the taxpayers' shares in the banks would not be easy. "The sheer scale of the holdings will make this the biggest share sale ever," he pointed out, adding that there was uncertainty in the market because of the Independent Commission on Banking, which is due to report in September. "Nevertheless I still think we will make a profit," Sir Nicholas said.

An RBS spokesman said: "We continue to make clear and tangible progress in rebuilding RBS and remain on target to exit the Asset Protection Scheme by the end of 2012."