Bailed-out banks' new lending deal 'unambitious'

Bailed-out banks are expected to announce a new lending deal alongside the Budget, but economists today slammed the plans as unambitious.

It is thought that Lloyds Banking Group and Royal Bank of Scotland will pledge to lend £90 billion to businesses this year after both banks missed their 2009 targets as customers rushed to pay down loans in the recession.

But Vicky Redwood, of Capital Economics, said plans to change the target measurement to gross lending - which would not include repayment levels - "may do little more than keep lending at last year's levels".

RBS, in which the taxpayer has an 84% stake, committed to lend an extra £25 billion last year in return for receiving state support - £9 billion for mortgages and £16 billion in loans to credit-starved firms.

Meanwhile, 41% Government-owned Lloyds agreed to lend £14 billion over a year in return for its bail-out, comprising of £3 billion for home loans and £11 billion to companies.

The banks were also supposed to lend at the same levels in the year from this month, although RBS has already said that potential changes to the targets were under discussion.

Both Lloyds and RBS met their 2009 commitments for mortgage lending and these are expected to continue to be measured on a net basis.

On a gross basis, RBS extended £60.2 billion to businesses in 2009, while Lloyds lent £35 billion, but the banks missed their net targets as companies sought to strengthen their balance sheets rather than take on new debt as the recession bit.

Businesses also reduced inventories and cancelled planned investments, further reducing their need for financing.

But critics have said firms have also been put off seeking new lending by unattractive rates, leaving small companies in particular with few places to go for affordable lending.

Ms Redwood said the new arrangements "do not look very ambitious".

While they would make it easier for the banks to meet their targets, she said if firms keep repaying loans - potentially under pressure from the lenders themselves - the move might not actually increase the amount of credit in the economy.

There was also "no guarantee" that any new targets would be met.

"After all, the previous targets were supposed to be legally binding commitments," she said.

"Yet the banks missed them, seemingly without any repercussions.

"Why should we be any more certain that they will meet these new targets?"

There has always been some doubt as to whether RBS and Lloyds could increase lending enough to boost economic recovery, according to Ms Redwood.

She said even if the banks had been able to fulfil their previous commitments, it would have increased net lending by only around 20% of the total amount bank lending needed to rise by.

"Overall, then, the new targets do not alter our view that a prolonged period of weak bank lending will be a key constraint on the strength of the economic recovery," she said.