Cable tells banks to start lending

Banks will be warned today that they face greater government regulation unless they “get their house in order” and boost their lending to cash-starved businesses.

Ministers fear that a shortage of credit for small- and medium-sized firms could scupper economic recovery. Private sector growth is crucial as the Government squeezes the public sector to cut the £155bn deficit.

In a Green Paper, the Business Secretary Vince Cable and Chancellor George Osborne will set out a “carrot and stick” approach aimed at breaking the lending logjam. The Government will play its part by expanding loan guarantee schemes. But it will seek to extend lending targets, imposed on the Royal Bank of Scotland and the Lloyds Banking Group after they were bailed out by all taxpayers, to all banks unless they do more to help companies.

Mr Cable would act initially through a voluntary agreement and would keep the “nuclear option” of legislation covering all banks in reserve to put pressure on them to increase the flow of credit. He will tell banks they could ease the crisis facing small firms if they kept their bonuses this year to last year’s levels.

The Business Secretary, who has become increasingly frustrated with the behaviour of the banks, said: “The banks are not acting in the national interest. I don’t think they get it. At the moment we are talking to them in an amicable way and we are monitoring them, but if this doesn’t work there are combinations of carrots and sticks that can be employed and they are under no illusions about that – and we are not either.”

In May, the banks lent £500m to small firms but recouped more in repaid debts and withdrawn overdrafts. Banks insist that four out of five applications for loans are being approved but business organisations claim many firms do not apply because the cost is too high or they expect to be turned down.

The banks argue that business customers, like householders, are using their deposits to pay off debt and that lending to both groups is governed mainly by demand.

The Green Paper will also include proposals to ensure greater competition and transparency in the banking sector. It will float the idea of bringing back regional stock exchanges as one way of improving business funding for firms who cannot afford a listing on the London Stock Exchange or the Alternative Investment Market.

Tomorrow Mr Osborne will publish 10 documents designed to streamline the tax system to help businesses and taxpayers. A government source said: “Our new and innovative approach to tax policy making is designed to create a more predictable, stable and simple tax system in the UK. Ministers believe our tax system should be an asset, not a liability. Not only should it help, not hinder existing businesses, from the big company to the sole trader, it should also serve to attract more business to the UK. The tax system should be a major part of saying the UK is open for business again.”