Fall in lending to small firms casts further doubt on banks' pledges

Bank lending to small businesses fell in the first two months of this year – casting further doubt on the banks' pledges to increase credit made under the Government's Project Merlin agreement. New loans to small and medium enterprises (SMEs) fell to £949m in January and February from £1.06bn a year earlier, according to figures from the British Bankers' Association. The number of new loans also fell sharply.

Britain's big five banks agreed in February to increase lending to SMEs by 15 per cent to £76bn as part of a wider plan to boost credit to companies. The SME element of the deal was seen as the most important because those businesses account for more than half the economy and have found it more difficult than bigger companies to raise new capital.

The BBA's figures tally with Bank of England data last week that showed SME lending fell in February.

The big banks have argued that SMEs wary of the rocky economy are holding off on investment, hitting demand for credit, and that they are happy to lend to viable businesses. But the Business Secretary, Vince Cable, increased pressure on the banks on Wednesday by accusing them of discouraging borrowers as they work to clear up balance sheets.

"People ask a preliminary question at their local bank and they're discouraged from applying. That is a real problem," Mr Cable said.

He warned that the banks could face further government action if they did not keep their pledge.

John Walker, chairman of the Federation of Small Businesses, acknowledged that demand from SMEs was down but said more than a third of FSB members who asked for more credit were refused.

Mr Walker added: "With the Business Secretary highlighting the need for small businesses to have access to finance, we hope that the banks will not place restrictions on lending.

"They should work with the businesses that come to them for help to assess their needs – even if they are refused formal lending – so that they can lead the private sector-led recovery that the economy is counting on."

Barclays bosses told shareholders on Wednesday that the bank's lending so far was on track to meet its Project Merlin commitment. Bob Diamond, the chief executive, said: "Lending is what we do."

The Bank of England's first-quarter Credit Conditions Survey showed a sharp fall in SME loan demand because of bad weather and economic uncertainty but predicted a pick-up in the second quarter.

The BBA's statistics director, David Dooks, said: "Lending trends in the first two months of this year appear stable, albeit below the corresponding time in 2010, but in line with the findings of the Bank of England's recent Credit Conditions Survey which found that credit demand from small businesses had fallen sharply."

So much for no demand

While other banks blame lack of demand for the fall in SME lending, Santander says it is picking up their clients to boost its business. The bank increased SME lending by 29 per cent in the first quarter.

Steve Pateman, head of business banking, said: "There are businesses that want to expand, invest in new facilities and take on working capital, but that is proving difficult with their existing banks, which are lending by numbers – they are kind of open for business but within very clear parameters."

Mr Pateman added that businesses were finding credit too restrictive or expensive elsewhere and that Santander was adding customers while taking on less risk than in the boom of 2005-06.