Concerns over flagship credit scheme as banks tighten belts to tune of £300m
Small business leaders disappointed at lending squeeze despite billions of available FLS funds
Monday 03 June 2013
Some of Britain’s biggest banks were forced on to the defensive on Monday as the latest Bank of England figures revealed more disappointment from its flagship initiative to boost lending.
Participants in Funding for Lending, which offers banks and building societies cheap loans in return for growing their loan books, instead shrank credit by £300m in the first three months of this year. This improved on a £2.4bn decline in the final quarter of 2012 but, overall, 40 FLS banks – representing £1.36 trillion in outstanding UK loans – have cut lending by £1.79bn since the end of last June.
Economists and small business leaders labelled the scheme’s lack of traction “disappointing” after initial hopes that it could boost lending by as much as £80bn, although the Bank said the sluggish performance was “broadly as expected”.
John Longworth, the director general of the British Chambers of Commerce, said: “It is a concern that lending continues to contract despite [it] having been in place for nearly a year. It is also worrying that usage of the scheme seems to have dropped significantly since the end of 2012.”
The biggest drag on lending came from taxpayer-backed Royal Bank of Scotland and Lloyds Banking Group, which were responsible for a £2.6bn decline between them. Both claimed the fall was due to winding down non-core business such as commercial property loans hit by the financial crisis. RBS said it had lent nearly £1bn to the real economy over the quarter while Lloyds is growing lending to small businesses 4 per cent year on year.
The Spanish-owned bank Santander, meanwhile, blamed a £2.3bn fall in net lending in the opening three months of the year on a shift away from mortgage loans to more capital-intensive business credit markets. “This refocused approach has led to an initial reduction in net lending,” it said.
In total, just 13 of 40 lenders drew down just £2.6bn in FLS funds over the quarter, with none of the bigger banks – RBS, Lloyds, Barclays and Santander – drawing down any extra funds. HSBC declined to participate in the scheme.
John Zhu, an economist at HSBC, said: “A lack of usage is not necessarily a bad thing, because lenders could be using the market as a source of funds rather than relying on the central bank scheme. However, there is no doubt that this data is disappointing, given that the FLS measure of net lending barely grew, suggesting bank deleveraging is ongoing.”
The Bank has attempted to kick- start business lending by allowing banks to draw down £10 in FLS funds for every £1 lent to SMEs for the rest of the year, and expanding the scheme to a wider range of non-bank lenders, although this has yet to show up in the official figures. Lending data last week showed a £3bn fall in business loans during April.
Andrew Bailey, the chief executive of the Prudential Regulation Authority and a Bank deputy governor, said: “Incentives to lend to SMEs are in place, no doubt about that. But we cannot promise that the results will follow almost as night follows day.”
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