Flaw in state scheme cited in weak bank lending to SMEs

Small and medium-sized enterprises struggling to get credit from their banks may be the victims of flaws in a government-backed scheme intended to encourage lenders to provide advances, a leading banker said today.

Philip Monks, the chief executive of Aldermore, a bank launched last year to target the business sector, said that design faults in the enterprise finance guarantee (EFG) scheme are making it difficult for banks to take advantage of the scheme and lend more to SMEs.

Figures from the Department for Business, Innovation and Skills show that just £149.5m worth of loans were advanced by banks under the scheme during the second quarter of the year – representing a 20 per cent fall on the levels seen in the previous three months.

EFG-backed lending is now down 59 per cent from its high point in the first quarter of last year, when it totalled £186m.

One problem may be the small print in the EFG scheme, which effectively caps the protection that banks lending through it can get from the Government. While 75 per cent of each loan made under the EFG is underwritten by the Government, the scheme is also capped at 9.75 per cent of the total funds lent by each bank.

In theory, this means that a bank making 10 loans of £100,000 each, say, would get £75,000 back on the first of the loans to default, but a maximum of £97,500 if all 10 loans were not repaid. The rule effectively acts as a brake on the expansion of lending via the EFG, Mr Monks said.

"SMEs need the Government to act now to iron out the problems within the scheme and incentivise lenders to lend more," he said. "With so many SMEs being refused credit by the big banks, the sheer scale of decline in lending through the EFG scheme is a big concern." Mr Monks' warning will throw the spotlight back on to the Government, which has become increasingly vocal about the failure of the banks to support the UK's recovery from recession by lending more. Small business groups have also blamed the banks for restricting their borrowing.

But leading banks, all of which have published first-half results in recent weeks, have rejected the accusations.

Stephen Green, the chairman of HSBC, Britain's biggest bank, has now launched an industry taskforce to look into whether more needs to be done in terms of funding for SMEs.

Mr Monks claimed: "Lenders are still reluctant to take any risks, and that capital that they have they seem to want to use for almost anything but lending to small companies."