Firms 'facing a loans shortfall of £21bn'

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Cash-starved companies face a £21bn loans squeeze this year as business lending falls to its lowest level since 2006, according to alarming new forecasts today.

Smaller businesses will bear the brunt of a 4.6 per cent fall in corporate loans to £429bn this year, Ernst & Young's latest forecasts for the financial sector warn. Business lending should return to growth next year but will not recapture 2008 heights for another four years, it adds.

The accountant blames a poor economic backdrop and tougher capital requirement for the shortfall as Britain's banks shrink their balance sheets by an estimated £300bn this year.

Carl Astorri, senior economic adviser to the Ernst & Young ITEM Club, said: "The good news is that 2012 is likely to be the last year of such marked deleveraging in the UK – the bad news is that, once again, SMEs will bear the brunt of it. Government schemes to increase lending may help a lucky few but, as banks are encouraged by regulators to store up more capital and to look again at their forbearance policies and so-called bad-loan books, most small business are going to continue to feel the squeeze."

Ernst & Young added that loan rejection rates for businesses were rising, and warned that attempts to boost lending through the business bank set up by Business Secretary Vince Cable, pictured, are likely to fall well short of filling a £19bn "financing gap" faced by SMEs.

Mr Astorri said: "The figures suggest that the business bank's lending capacity could be exhausted in less than a year. Its impact will also be reduced by competition with private sector lending activity: even if the Government aims to lend at market interest rates, it is unlikely to be able to avoid displacing existing lending activity. Indeed, we expect the business bank will have to compete for projects that are commercially viable, and so we do not think the scheme will have a tangible impact on the economy."