Lack of bank lending stalls SME investment initiatives
A THIRD of SMEs may have no plans to invest in growth this year despite UK banks failing to reach lending targets.
The figure, issued by lender Venture Finance, comes as official data released by the Bank of England shows Britain’s top five lenders missed lending targets to smaller businesses last year by more than £1bn.
The five main high street banks – Lloyds Banking Group, Royal Bank of Scotland (RBS), Santander, Barclays and HSBC – had agreed last February as part of the Government’s Project Merlin incentive to lend at least £76bn to the SME sector during the following 12 months.
The BoE data confirmed that released by the British Bankers’ Association on Friday, that only £74.9bn was awarded to the SME sector during the period.
While it has not been released officially, it is thought RBS – 83% taxpayer-owned – is mainly responsible for the shortfall. Its full-year results will be issued later this month.
Despite the shortfall in the SME sector, the figures show that lending to all businesses exceeded targets with £214.9bn authorised against a target of £190bn.
Peter Ewen, managing director of Venture Finance, said: “Despite Project Merlin’s promises to boost lending to SMEs, the banks fell short of expectations, particularly with regards to small businesses. As a result, many SMEs have not benefitted from the scheme and are still struggling and in need of cash.
“However, the banks are not entirely to blame as we are still clearly facing the problem of a depressed demand for any type of finance. Our own statistics show that almost a third of SMEs have no plans to invest in growth this year.”
He said Project Merlin had had good intentions to help SMEs and boost the wider UK economy but it may have ended up being a box ticking exercise.
“It put SME lending in the spotlight but it is telling that lending targets will not be imposed on banks going forward. The Government should look at the business demand for finance and seek to encourage investment and growth if it is to bring the economy back to life,” he said.
Richard Halstead, Midlands region director at EEF, the manufacturers’ organisation said that while the banks had missed their targets, the relatively small shortfall demonstrated they were at least trying to lend.
However, he said the reality was that SMEs continued to be frustrated by the cost and terms and conditions around lending, with some opting out of using external finance altogether.
“This cannot be good for growth,” said Mr Halstead.
On a net basis, Bank of England statistics show that lending contracted all the way through 2011 and while some of this will be due to falling demand in the face of challenging economic conditions, supply side constraints caused by a lack of competition and a lack of competing sources of finance outside of banks remain part of the problem.”
He said the challenge for 2012 was how to offset the forces dampening demand for finance by improving the conditions of supply.
“The government’s credit easing initiatives will be challenging to implement but seem to offer a prospect of making some improvement on access to finance,” he added.
Matthew Fell, CBI director for Competitive Markets, said: “It’s encouraging news that banks have met their overall Project Merlin lending targets, helping to foster business growth and job creation.
“However, lending conditions remain tight for smaller businesses, as demonstrated by the slight shortfall in the SME Merlin lending figures.
“This shortfall strengthens the need for banks to continue to work closely with their customers, especially smaller and medium-sized companies, to help address business needs and to give them more confidence to approach their bank.”
He said there was no doubt that regulatory changes and higher wholesale funding costs had in part constrained banks’ ability to lend, so a wider range of funding models needed to be explored.
He added that for this reason, the Government had to implement the proposed credit easing scheme as soon as possible.
