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Business News

Lenders still failing to help firms, Bank says

Britain's banks are still lending less money to businesses, the Bank of England warned yesterday, publishing figures which showed that two years' of declines continued over the second quarter of 2011.

Lending to business fell at an annualised rate of 3.7 per cent over the three months to the end of June, the Bank said, despite the promises of the banking sector, under the Project Merlin agreement, to make finance more widely available.

Small and medium-sized businesses were hit particularly hard by the continuing squeeze on credit, the Bank's figures suggested.

That data is in line with the banks' own figures which suggest that, while they may yet hit their overall targets in 2011 for lending to businesses, they are likely to fall short of the pledges made to SMEs. "Larger companies have wider access to funding than smaller companies," the Bank's Trends in Lending report concluded.

Some banks have argued that there is little appetite among companies for further borrowing, particularly at smaller firms which have instead been trying to pay down debt.

However, small business groups have suggested this perception may be explained by the fact that many companies are nervous about even approaching lenders.

"Small firms have been telling us for the past few years they are fearful of approaching the banks for new finance, or to extend an overdraft, because they know they are likely to be turned down, or be offered a deal on terms that just aren't favourable for them," said John Walker, national chairman of the Federation of Small Businesses.

The Government has threatened the banks with further legislation on regulation or taxation if the sector does not begin to lend more. Vince Cable, the Business Secretary, in particular, has warned that the inability of small businesses to get credit threatens to hold back Britain's economic recovery.

The minutes of the July meeting of the Bank's Monetary Policy Committee, which were published this week, revealed that seven of its nine members had again voted to hold interest rates at a record low of 0.5 per cent, but one member, Adam Posen, had again suggested a return to quantitative easing (QE) was necessary.

Yesterday, he said the current level of interest rates was not sufficient to stimulate the economy and that he would continue to press his colleagues to act.

"I am hopeful that the decision will be taken to undertake more QE," Mr Posen said.

Borrowing fears ease

The latest official data on the state of the UK's public finances, published yesterday, will have calmed ministers' fears amid the growing nervousness about the state of the economy.

Data from the Office for National Statistics showed that the UK borrowed £14bn in June, marginally more than expected, but also that the figures for April and May were slightly better than previously thought. As a result, borrowing over the first quarter of the financial year was in line with the forecasts made at the Budget by the Office for Budgetary Responsibility.

Economists did point to some warning signs, however. In particular, while January's VAT increase continues to buoy overall tax receipts, the amount of revenue coming into the Treasury from income tax and other duties on wealth is growing much more slowly than expected, a trend that will become more problematic if it continues.