Recovery hopes hit by a collapse in bank lending

A collapse in business lending and a "lacklustre" month for the mortgage market cast doubts over efforts to get credit flowing yesterday, despite signs of recovery on the High Street.

Bank of England figures revealed the flow of loans to businesses shrank by £2.2bn in August, while the Council of Mortgage Lenders (CML) reported a 10 per cent slump in home loans.

The news underlined the urgency of the Bank and Treasury's efforts to boost lending via the new £80bn Funding for Lending (FLS) scheme, although retail figures provided some cheer with a 0.6 per cent rise in volumes during September. Sales were up 1 per cent over the quarter – the biggest rise for two years – fuelling expectations that the UK will manage to pull out of its double-dip recession.

But the Bank's Trends in Lending report showed overall business lending shrank 3.1 per cent in the year to August, with loans to smaller firms shrinking since June last year. Smaller players "continued to report that they were unable to obtain credit", although lenders claim demand for loans is muted.

Adam Marshall, the British Chamber of Commerce's policy director, added: "These numbers reflect underlying uncertainty across the economy.

"However, they also suggest that the banking sector is continuing to deleverage, that the cost of credit has not come down despite repeated interventions, and that there are still many businesses out there who say that cannot access the credit they need."

The latest gloom came as the CML said mortgage lending fell to £11.6bn in September. Gross lending – including remortgaging and loans for house purchase but not repayments – is down 15 per cent on last year.

The CML's chief economist, Bob Pannell, said: "Much of the reduction appears to reflect weaker house purchase activity compared with August."