Lending fell by £2.4bn despite credit-boosting scheme

Grim figures in final quarter but some hope after January upturn

A scheme aimed at boosting credit to households and businesses has so far failed to get banks and building societies to lend more, figures showed today.

The Bank of England said net lending in the quarter to December 31 fell by £2.4 billion on the previous quarter, despite participants of the Bank of England's Funding for Lending (FLS) scheme drawing down another £9.5 billion over the period.

The Bank said it expected credit conditions to improve over the course of the year and pointed out that net lending increased £3.1 billion in January.

Barclays has tapped the scheme for £6 billion since June and lent almost all of it, while Santander reduced lending by £6.3 billion in the last six months despite drawing down £1 billion.

Alan Clarke, director at Scotiabank, said: “It is not entirely unexpected that lending has gone down. The Bank would say that this is not a bad thing, in the absence of the FLS, lending might have fallen even more.”

In the fourth quarter 11 banks and building societies brought the total amount drawn from the scheme to £13.8 billion.

The FLS scheme was launched last summer by the Bank and Treasury to offer lenders funding at low interest rates on condition it is passed on to households and businesses.

In a recent speech Paul Fisher, executive director for markets at the Bank of England, said the FLS had clearly shifted the supply of credit, with loans generally available at lower cost than previously.

He said: “Even though lending rates have fallen, it is still quite early for much extra money to have flowed from the application stage into actual loans, compared with previous plans which showed that lending was most likely to fall in aggregate without the FLS.”

Taxpayer-backed lenders Royal Bank of Scotland and Lloyds Banking Group also saw lending fall, despite drawing money from the scheme.

Lloyds has drawn £3 billion so far, but lending fell by £3.1 billion last quarter, while RBS has taken £750 million, but its lending still fell by £1.7 billion.

The figures come as the Bank's Monetary Policy Committee (MPC) meets this week to consider whether to restart its quantitative easing (QE) - or money printing - programme.

The MPC has held off more asset purchases, looking to the FLS to provide a much-needed boost to the economy.

But the disappointing figures, and a raft of gloomy February data which has sparked fears the UK is heading for an unprecedented triple dip recession, will put further pressure on the MPC.

Howard Archer, chief UK and European economist at IHS Global, said: "Concerns over the effectiveness of the FLS scheme will hardly have been eased by the latest lending data and it will add to mounting pressure on the Bank of England to find ways of getting working capital through to smaller companies in particular."

But British Bankers Association chief executive Anthony Browne said: "Business activity is normally subdued at the end of the year and in difficult economic times many households and businesses are looking to pay down debts rather than take on more borrowing."

He insisted that the FLS was making a real difference in providing "innovative offers and some of the lowest interest rates for customers in history".

Adam Marshall, director of policy and external affairs at the British Chambers of Commerce (BCC), said the latest update was "clearly disappointing".

He said: "The real test for the FLS has always been whether the funding reaches fast-growing and new firms, and unfortunately the latest Bank of England Credit Conditions Survey confirmed that small firms continue to be left out in the cold."

Seven lenders - Aldermore, Coventry Building Society, Cumberland Building Society, Julian Hodge Bank, Metro Bank, Monmouthshire Building Society and Virgin Money - drew funds from the scheme for the first time in the fourth quarter and all increased lending in the period.

Virgin Money drew £510 million from the scheme in the final three months of last year and its net lending flow increased to £491 million in the quarter.