Small talk: Don't give too much credit to bank claims on small-firm loans

  • @davidprosserind

For three years now, Britain's banks have insisted that only a tiny number of SMEs applying for credit are being turned down. The banking industry was at it again last week, crowing about data from the SME Finance Monitor, a quarterly survey of 20,000 small and medium-sized firms. Just one per cent said they had been turned down for credit over the 12 months to the end of the first quarter of the year.

That sounds respectable, but how do these numbers square with the first annual report just published by Professor Russel Griggs, the independent external reviewer appointed to monitor the appeals process set up for SMEs that believe they have been unfairly denied credit? Professor Griggs' report says there were 827,000 applications for credit over the 12 months to the end of March from SMEs that were eligible to appeal in the event of being turned down (any business with an annual turnover of less than £25m). Of those, 114,000 were rejected. That's 14 per cent of applications – or 14 times as many as one would expect on the basis of the SME Finance Monitor.

The discrepancy is more easily explained than you might think. The one per cent figure the British Bankers Association chooses to highlight in the SME Finance Monitor is based on all the businesses covered by the survey – even though the vast majority of them hadn't applied for credit over the previous year. Around 15 per cent did, which suggests the true rejection rate identified by the survey was more like 15 per cent.

Note too that even this figure may understate the true scale of the problem. While overdraft requests were more likely to be successful according to the SME Finance Monitor, one in four – 25 per cent – applications for a loan were turned down.

Maybe those lending decisions were right, of course. But Professor Griggs' report rather suggests a good number of them may not have been. It reveals that just over 2,000 SMEs appealed to the Banking Appeals Taskforce last year after having credit applications rejected. A remarkable 40 per cent had their appeals upheld.

The sample size is small – not least because many banks don't exactly shout about the appeals process when rejecting SMEs' credit applications – but the implication of these figures is that a very large number of small businesses are still being wrongly denied access to credit.

Who is to blame? Well, Professor Griggs thinks bank staff need more training as they make the transition from selling credit – their pre-crisis default option – to providing it to businesses where it is prudent to do so. He also points the finger at the credit rating industry, where the credit scoring practices on which so many lending decisions are now based are opaque and poorly understood.

It appears the Government isn't prepared to wait for matters to improve. The £100m it is now handing over to sources of non-banking funding such as peer-to-peer lenders may be modest, but the gesture implies ministers do not believe the banks are doing their jobs properly when it comes to extending credit. Professor Griggs' figures suggest they're right.

Crowd funding: GXG joins hands with the Swedes

More interesting goings-on at GXG, the European exchange group which, as Small Talk reported last week, is hoping to benefit from the misfortunes that have befallen Plus Markets in the UK.

While continuing to plough that furrow, GXG also has high hopes for a new joint-venture with Crowd Equity. The Swedish business specialises in crowd funding, an opportunity for companies to raise money online by appealing directly to investors – they each subscribe for far smaller shareholdings than an institution would even consider, but the idea is that many hands makes for light work.

Crowd funding is in its earliest stages – Seedrs is in the process of launching the first venture of this sort in the UK, while the US has only just passed new laws to legalise this method of raising money.

However, GXG believes the movement would be boosted by the launch of a secondary market providing liquidity to existing investors. The pair plan to launch exactly that imminently.