No one should be surprised about the state of business lending, argues Steven Nicholas, chief executive of Tiuta
In one of the biggest cases of, ‘Tell us something we don’t know’, earlier this week the Bank of England announced that the much-trumpeted Project Merlin was not achieving one of the core parts of what it was designed to do – namely increasing the amount of money the major banks should be lending to SMEs.
Lending to small business for 2011 reached £74.9 billion, which was some £1.1 billion short of the target that had been agreed just over a year ago. Now, while £1.1 billion out of a £76 billion target may not seem like a big deal – after all, it is only 1.45% – we have to consider the actual sums involved. £1.1 billion in anyone’s language is a huge amount of money and I’m sure there will be businesses up and down the land who would have welcomed a very small amount of this being lent their way.
The fact is that an extra £1.1 billion of lending would have had a major impact on those firms who were ‘lucky’ enough to receive it, with a huge knock-on effect on jobs, productivity, growth, etc. What is perhaps even more galling is that lenders like ourselves could easily have found a home for this amount of funding and, not only would we have benefited the economy considerably by lending it out, we would also have delivered a return for the bank(s) that were unable to fulfil the target they agreed to.
Speculation is mounting about which of the banks failed to meet their own lending targets, with the rumour mill focusing on the Royal Bank of Scotland. To my mind, it is quite irrelevant which bank did not lend its fair share, the fact is that together they agreed they would lend £76 billion to smaller businesses and they have failed in that commitment.
Bigger picture (and no doubt, in-house banking) analysts would have us look at the overall business lending targets for Project Merlin which have been beaten. The banks said they would lend £190 billion to businesses under the Project in 2011 and the figure was actually £214.9 billion. However, the Bank of England admitted that overall there was a contraction in business lending to the tune of £9.6 billion last year. So we have a situation where the big banks said they would lend more and didn’t, and they said they would lend a certain amount to smaller businesses and they failed to do this as well.
It is hardly a sweeping example of unmitigated success, is it? But let us move on. If those were the commitments for last year, what about 2012? Well, here we have something of a stumbling block because there are no targets for this year. None at all. The major banks have given no commitment to lend which leaves all the focus on the government’s ‘£20 billion credit easing’ scheme which was announced by the Chancellor in his Autumn statement last year. This was apparently the scheme which would have the government guaranteeing the loans to small businesses and would mean a much greater line of freely available credit at lower interest rates.
So, how are we doing here? Again, it will surprise no-one that the scheme isn’t even up and running yet. It was due to begin at the start of the year but no such luck. So, just to clarify, no targets for banks to lend to small businesses in 2012 and the scheme which was designed to take away the need for such targets hasn’t even kicked off.
Which should leave everyone with a deep sense of frustration and an inkling into why growth is stalling in the economy and we are apparently on the brink of recession again. It is has been proven that, even with the state-owned banks, the government has little power to get them lending and, even with the next round of quantitative easing on its way, how certain are we that any of this money will actually reach the economy, rather than merely sitting on banks’ balance sheets?
It is all very disappointing if not entirely predictable. We have said for many months that Merlin was far from magical for most businesses indeed the money that was promised appears to have vanished into thin air. Lenders like ourselves are ready, willing and able to get this money out to businesses however we still find banks less than enthusiastic about either a) lending it themselves, or b) offering us funding lines to do it for them.
The fact is that, for the foreseeable future, lending levels are unlikely to thrill anyone and, with no set targets for this year, one suspects that by this time in 2013 we will once again be talking about an even greater reduction in business lending. You don’t have to be Merlin to see that one coming.