Banks turn away even more firms seeking loans

Britain's banks have restarted their lending squeeze, starving small companies of credit, the Federation of Small Businesses (FSB) warns today.

Its quarterly Voice of Small Business Index, which surveys the sector's confidence, has found that four in 10 small firms applying for credit are being turned away. The effects are malign, including the 10th consecutive quarter of job cutbacks. Confidence among small businesses and entrepreneurs has fallen in every industry sector except health and motor services.

The findings came days after the Bank of England launched its initiative to lend up to £140bn to banks, much of which they will have to pass on in lending

Meanwhile the Engineering Employers Federation, which represents the manufacturers, has urged the Government to increase competition between banks and address "a lack of options for accessing finance to support growth outside of banks".

The federation said it wanted to see the "funding for lending" scheme getting cash to firms that need it "with a clear reporting process so that tangible evidence is given to show the money is being passed on to small firms and not just shoring up the banks".

Last year banks agreed to make more money available to small firms through Project Merlin, but critics said net lending fell and claimed that much of the new credit was not offered on economic terms.

Sources denied suggestions yesterday that the Bank of England Governor, Sir Mervyn King, has told banks they may reduce the amount of cash they hold as a safety buffer and lend the money to customers instead. Sir Mervyn has previously said that banks should shore up their defences against another crisis. Any decision to change the banks' buffers would have to be made by the Financial Services Authority.