Banks fall short on pledge to lend to smaller firms

Figures show big lenders are almost £1bn short on SME loans and at odds with Bank of England

Britain's banks are behind on their pledge to lend to smaller firms and face continued criticism for their lack of support for businesses that are vital for economic recovery.

Figures from the Bank of England yesterday showed Britain's big five high street lenders are almost £1bn short on their commitment to make £76bn of loans available to small and medium-sized enterprises (SMEs) this year.

In the first nine months of this year they made £56.1bn available to SMEs, leaving them with £19.9bn of lending to complete in the final three months of 2011 under the Project Merlin agreement hammered out with the Government in February.

The banks are on track for their pledge to agree £190bn of loans to UK firms but the SME figure is particularly sensitive. SMEs make up more than half of the British economy and rely far more on bank lending than large companies that tap capital markets.

John Walker, the chairman of the Federation of Small Businesses, said: "While the banks are on course to meet lending targets to all businesses, they have yet again missed the small business target. We need to see a clear change: more competition and new lines of credit opening for small firms if they are to help boost the recovery. The Chancellor can address this by making credit easing open for firms that want small amounts of finance."

The Chancellor, George Osborne, has admitted more needs to be done to get credit to businesses. He has pledged to introduce "credit easing" – public sector support for company borrowing – with details due in his Autumn Statement.

The Bank's Governor, Sir Mervyn King, has called on the Government to encourage bank lending to SMEs, including tax incentives and explicitly directing state-backed Royal Bank of Scotland and Lloyds to lend more.

The Project Merlin figures are at odds with the Bank's own numbers. The Merlin figures show "gross lending facilities" of £57.4bn for the third quarter of 2011 but the Bank calculates gross lending at just £25.5bn, excluding "rollovers" of existing facilities.

The Bank's figures show net lending to all businesses barely grew in the quarter, by just £400m. Net lending shows the amount made available minus customer repayments.

The banks blame low net lending on businesses repaying debt and unwilling to borrow because they are scared about the economy. Critics argue they are frightening off potential borrowers with high rates and harsh terms. Terry Scuoler, chief executive of the EEF manufacturers' organisation, said: "The cost of credit and those terms and conditions outside the headline rate remains a major concern, especially for SMEs."