Mandelson: Our banks will resume lending

Some companies are now scared to approach lenders, warns Bank of England

Banks should be in a position to restore at least some of the flow of credit to the economy "fairly soon", the Lord Mandelson, signalled yesterday. Lenders "should not substitute excessive caution for the excessive risk taking of the past" and jeopardise "otherwise viable concerns", he warned.

The Business Secretary's declarations come as the Bank of England, in an extraordinary intervention, said some businesses had become frightened of even approaching their bank mangers.

Lord Mandelson told The Independent that Britain "should start to see a change in lending behaviour" thanks to the authorities' efforts to strengthen the capital and liquidity of banks, and commitments made by RBS and Lloyds Banking Group. While stressing the position was "not going to turn around overnight", the peer added that "we should start to see some changes happening fairly soon" and a "stronger pattern of lending emerging".

A relaxation of credit tensions is crucial if more companies are to avoid bankruptcy but, in its latest Agents' Report - a compilation of evidence gathered by the Bank of England's network of regional representatives - the Bank warned yesterday: "Firms were wary of approaching banks for finance for fear of triggering an unfavourable review of existing facilities. A number of contacts felt banks had tightened the criteria applied to requests for new lending."

Agents also found there were "widespread reports that the cost of existing bank loans and facilities had not fallen in line with Bank rate", it added.

Lord Mandelson urged banks to show "flexibility and understanding" - especially when enforcing the terms of banking covenants - and not to "seize on every missing dot or comma" as businesses approached the end of their financial years. In return for taxpayer assistance though the Asset Protection Scheme and other measures, RBS and Lloyds have agreed to lend an extra £78bn over two years, over and above their existing plans. The nationalised Northern Rock will extend its loan book by £14bn over a similar period.

In answer to suggestions that the expectations for the forthcoming G20 summit were too high, Lord Mandelson dismissed some commentary surrounding the conference as a "media game". He said world leaders were not going to be able to "rebuild Rome in a day" and undo in a single meeting all of the damage done to the global economy by the financial crisis.

He said the US and Europe were "fundamentally together" but there might be differences on the timing of stimulus packages. Lord Mandelson said: "There must be a good middle way between excessive caution and risking measures that are not properly planned." The G20, he added, had become the "steering committee" of the world economy.

Along with the Confederation of British Industry, the Department for Business yesterday hosted the so-called "B20" - business leaders from some G20 economies, including representatives from the US, Japan and China.

Lord Mandelson said business leaders were looking to send a clear message to the G20 to "stave off protectionism". "After the last G20 in November, some members went home and started raising tariffs and putting in place protectionist measures," he added. "If that spirals, than the global economic machine will not only have stalled but it will have started to roll backwards."