RBS and Nationwide cut loans to small firms despite state aid

Net new credit fell £1.3bn in the last nine months of 2013, Bank figures show

Net lending to small businesses shrank last year, despite the Bank of England/Treasury scheme to give banks an incentive to lend, official figures confirmed on Monday.

The Bank reported that banks taking part in the Funding for Lending Scheme drew down £18.7bn of cheap loans in the final quarter of 2013 and created £5.8bn in net new loans to households and businesses during that period.

Over the full 18 months since the FLS was established, banks drew down £42bn and increased their net lending by £10bn. The final figures for the first phase of the scheme were hailed as a success by the Bank of England and the Treasury. A spokesperson for the Treasury said the scheme had “played a crucial role in underpinning the recovery”.

Paul Fisher, the Bank’s director of markets, said: “The FLS has been successful in meeting its initial objective to provide incentives to banks and building societies to boost their lending to the UK real economy”.

However, the Bank also published a breakdown of the lending figures under the scheme, which showed that banks reduced their net lending to small firms by £1.3bn between April and December last year. This decline came even though the Bank had made reforms to the scheme last year to further incentivise small business lending.

The figures showed that there were big reductions in net lending by the Royal Bank of Scotland and Nationwide, which slashed their net lending by £2.2bn and £1.1bn respectively over the three quarters. This offset the work of Lloyds, which increased small business lending by £1.1bn over that period. Santander increased net loans by £450m. However, net new loans to households grew by £16bn over the final three quarters of last year.

Labour said the figures showed that the scheme had failed small businesses. “We called a year ago for the scheme to prioritise lending to business but the Government was too slow to act. Britain’s businesses deserve better than this,” Cathy Jamieson, the shadow Financial Secretary to the Treasury, said.

Lord Oakeshott, a former Liberal Democrat Treasury spokesman who resigned over the Treasury handling of the banks in 2011, also said the FLS had not worked: “The fatally flawed Funding for Lending Scheme has ramped up mortgages and home prices but failed Britain’s small businesses,” he said. “That is neither sensible nor sustainable. The Treasury should have got a grip far sooner, especially on RBS’s lamentable failure to lend.”

The second phase of the FLS kicked in at the beginning of this year and the funding subsidy will apply only to banks’ corporate lending. Under the new formula, participating banks will, in total, be eligible to draw down £32.7bn in cheap loans. Lloyds will have an allowance of £16bn and Aldermore will be able to draw down £4bn. Nationwide and RBS will have no initial allowance, although they will become eligible if they increase their net corporate loans this year. Barclays will no longer be taking part in the scheme and so will not be eligible for the subsidy.

Separate credit figures from the Bank yesterday showed that lenders approved 76,947 new mortgages in January, the largest number of approvals since November 2007.