Downturn leaves businesses running scared of lenders

Recession is leading to far-reaching changes in British companies, warns CBI boss
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The Independent Online

Banks may lack the ability to finance a sustained a recovery from a recession that will inflict long-term damage on UK companies and the wider economy, the Confederation of British Industry (CBI) warns today.

The employers' organisation says the experience of the slump has made employers more risk averse, companies are more nervous about investing in their futures and business people are less willing to rely on banks for finance. Richard Lambert, the CBI director-general, said: "There is at least a question about whether the banks will have the firepower to finance a sustained period of economic recovery and growth."

Such a sea-change in attitudes will have serious repercussions for increases in productivity, economic growth and living standards reaching far into the future, potentially affecting the UK's trend level of growth. The recession has already slashed private sector investment in industry and commerce by more than a third.

The CBI, whose annual conference opens today, conducted a survey of 500 chief executives and chairmen of UK companies and obtained disturbing results. More than a third (35 per cent) said that their ability to access bank finance had fallen significantly, with close to a half believing that bank lending was deteriorating. One anonymous respondent said: "It has made our business much more risk averse."

Many bosses said they were pursuing a more "conservative" approach to debt. One explained: "[The credit crisis] confirmed what we already knew in the first place: never borrow from banks. We have now reaffirmed this going into the future and we are looking for other places to borrow money."

But although larger companies have been able to tap buoyant capital markets, smaller firms are finding it more difficult to avoid borrowing from banks. Large spreads – up to 6 per cent on Libor, said Mr Lambert – are making corporate borrowers nervous about how high rates could go after the Bank of England ends its policy of ultra-low rates and quantitative easing, injecting money directly into the economy.

The CBI said: "Debt will be a less attractive source of finance for business over the next five to 10 years. Businesses will reduce current debt levels and will seek a wider range of sources and types of finance, but financing for small and medium-sized enterprises will be challenging. Across the board, the cost of capital will be elevated, hence hurdle rates for investment will also be raised."

The recession seems to have prompted a change in the attitude of business to risk. The CBI's member firms do not see credit terms falling back to pre-crunch levels and, having become wary of higher debt levels, say that they will look for alternatives to debt-driven growth to protect investment and innovation.

Companies are also said to have become much more conscious of the risks involved if their suppliers fail. More than half of those surveyed said they were concerned that their supply chain arrangements posed a risk when the impact of the recession was at its most acute. One in three said they would be increasing their numbers of suppliers, and one in five said they would be offering finance to key suppliers, reducing dependency on "just in time" processes, and shrinking geographic distances to suppliers.

A more flexible workforce has helped to keep the increase in unemployment far lower than the CBI's economists had predicted, with many companies finding staff willing to alter working hours to save jobs. The CBI predicts a "smaller core workforce and a larger 'flexiforce' in the future".

Mr Lambert added: "We may be at the start of a new era for businesses, in which attitudes to finance and to corporate leadership are changed for a generation by the shock of the past two years.

"What we now need is a more balanced, less risky pathway to growth, one in which the short-term returns may be lower, but the long-term rewards for management success will be a lot more sustainable and secure."

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