Small Talk: SMEs could pay the price if banking reform hits lending

Unlike households, there are no state-backed safety nets to protect firms when they fall

David Prosser
Sunday 22 April 2012 22:14

Is banking reform set to stymie the supply of credit to small and medium-sized enterprises (SMEs)? It's easy enough to make that case: as banks are required to hold more capital relative to the scale of their liabilities, they will have less money to lend to customers. And with greater reliance on risk weightings in capital ratios – and SMEs are judged more risky than larger businesses – smaller businesses may be particularly hard hit.

The counter-arguments, however, are made in a major new piece of research from the Organisation for Economic Co-operation and Development (OECD). The body is to begin producing an annual report on financing SMEs, so concerned has it become about the lack of access to credit for small businesses in many markets.

Above all, the report points out that even before the introduction of the Basel III banking reforms, SMEs in almost every industrialised country, including the UK, have seen credit flows restricted.

"Access to finance represents one of the most significant challenges for entrepreneurs and for the creation, survival and growth of small businesses," says the OECD report, published over the weekend.

Yet SMEs have been hit disproportionately hard by the credit crunch. They've suffered rejections of applications for credit more often than larger businesses, and where they have been successful, they've usually been forced to pay more to borrow.

Those problems can't be blamed on banking reform, since the reforms have yet to be implemented (or even fully agreed). Rather, they're the result of the financial crisis itself, which has changed the behaviour of the banks.

Indeed, the evidence suggests that SMEs are more likely to be damaged by any financial crisis. They're more dependent on external financing than larger businesses and less able to hedge against the risk of a crisis. And unlike households, there are no state-backed safety nets to protect them when they do fall.

In that context, the Basel III reforms look much less threatening to SMEs. If those reforms are successful in their chief objective, which is to prevent future financial crises, SMEs should derive greater benefits from them than larger businesses, even if there are some difficult side-effects.

Moreover, as the OECD points out, there may be ways to mitigate those potentially harmful side-effects of banking reform. That is already happening: as the Bank of England and the European Central Bank have kept the cost of borrowing so low, interest rates have often remained more affordable than prior to the crisis, even if SMEs have had to pay higher costs.

Government guarantee schemes may help too. Banks calculating their financial strength using risk-weighted assets will have to worry less about loans to SMEs that are underwritten by the state.

It may even be preferable for the Government to disencourage banks from moving to compliance with the new Basel III standards too quickly, given that the economic recovery remains so weak. We are currently seeing a race to quality, with banks vying to improve their ratios more quickly than their rivals. In other circumstances, that might be desirable, but not where the knock-on effect is to damage growth unnecessarily.

Lok'n Store unaffected by rivals' tax blow

When George Osborne, the Chancellor, announced last month that VAT is to be charged on all self-storage for the first time, the value of Lok'n Store fell sharply, as did the price of its bigger rivals in the sector.

But while those rivals will suffer from the Budget change, either by taking the VAT hit on the chin or by trying to pass it on to customers, Lok'n Store is not affected, because customers already pay VAT on its services. Unlike much of the rest of the sector the company isn't set up as a real estate business, a structure that has previously offered VAT exemption.

Lok'n Store's interim results are due today and analysts are positive. Panmure Gordon's Paul Jones points to the "material advantage in future pricing" for Lok'n Store in its markets" from the VAT anomaly.

Panmure has a target price of 126p for the stock, compared to Friday's closing price of 101p.

Total deal aids TomCo

TomCo Energy, listed on Aim, is set to benefit from a $400m oil shale joint venture in Utah between Total and Red Leaf Resources, in which TomCo has a $5m stake. The British company also has its own resource 15 miles away, which is roughly the same size as the Red Leaf asset into which the French oil major is pumping money

Small Businessman of the Week: William Tunstall-Pedoe, founder, True Knowledge

I started the business about five years ago having previously focused on using artificial intelligence to create technical but niche products. After that I wanted to tackle a really big problem and the biggest of all was improving internet search.

"The business was founded to do exactly that and we've developed some really deep technologies. About a year ago we decided to create our own consumer-oriented brand and that's when Evi was born.

"Evi is a voice-activated search engine app for your mobile phone that understands you, will find things out for you and do things for you. Our platform has 700 million atoms of knowledge that Evi understands and it can also combine those atoms to answer questions it doesn't.

"We had our test version running when Apple announced the iPhone 4S, which comes with Siri, its voice-activated software.

Apple has defined the market for us and in terms of technology, we're very credible. Plus we're available on Android and lower-spec versions of the iPhone.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

View comments