Bank’s flagship credit scheme flops again as lending falls £300m

The Bank of England’s key tool for boosting credit to the economy drew heavy fire today as lending shrank by £300 million in the first three months of the year.

The Bank’s joint initiative with the Treasury, Funding for Lending, is designed to reward its 40 participating banks and building societies with ultra-cheap funds in return for growing their lending. But the latest figures showed a £0.3 billion slide in the latest quarter to March.

Less than a third of participants — just 13 — drew down a meagre £2.6 billion from the scheme. In total net lending among participating banks has shrunk £1.79 billion since June last year despite banks drawing down £16.45 billion in FLS funds.

Paul Fisher, the Bank’s executive director for markets, said the figures were “broadly as expected” and expects lending to “pick up gradually” throughout the rest of the year. But RBC Capital economist Jens Larsen said the latest update “can only be described as disappointing”.

British Chambers of Commerce director-general John Longworth also hit out: “It is a concern that lending continues to contract despite the FLS having been in place for nearly a year. It is also worrying that usage of scheme seems to have dropped significantly since the end of 2012.”

The Bank of England and the Treasury massively increased the incentives on offer for banks to lend to businesses in April, which has yet to feed into new loans.

The detailed figures showed taxpayer-backed Royal Bank of Scotland and Lloyds Banking Group, as well as Spain’s Santander, largely responsible for the shrinking lending picture. RBS and Lloyds in particular are battling to reduce the bloated commercial property lending portfolios built up before the financial crisis.

This offset the £5.1 billion lent by 27 other banks during first three months of the year. RBS insisted the bank was “continuing to punch above our weight” and had lent £600 million extra to businesses in the first three months of the year.

Barclays has drawn down £6 billion under FLS and grown net lending by £6.8 billion since last June. Mortgage lenders like Nationwide, Virgin Money and the Coventry Building Society have also taken advantage of the cheap funds to grow home loans and bring down mortgage costs.