Safer Means Double Dip - Bring Back Reckless Lending

As the Bank of England (BoE) published data showing yet another month when more loans had been repaid than had been granted,  Vince Cable admitted the level of anxiety in the government about the flow of funds to smaller companies. He said: "The green paper will acknowledge the scale of the problem and how the recovery could be aborted if we don't get on top of this.


"There is a fundamental policy conflict between efforts to make the banks safer and our wish to get them lending more freely to promote growth," Cable said.


He has been presented with research from the banks – which have given the work by PricewaterhouseCoopers the name "Project Oak" – showing that tougher capital rules and the end of emergency liquidity injections from the BoE could drain the banking system by £1 trillion in the coming years.


Cable believes there is a "very frustrating standoff" between the banks and small businesses: banks argue there is no demand, while businesses say they are not applying for loans because they expect to be rejected or the cost is too high.


"We have to acknowledge there is an issue," said Cable. Even so, he does not appear to be ready to alter the current lending targets for Royal Bank of Scotland and Lloyds Banking Group, which run until next March.


Since the 2008 banking crisis, lending figures from the banks compiled by the BoE have been positive in only three months. The Liberal Democrats calculated that £46bn of loans had been withdrawn in the past year alone.


Howard Archer, economist at IHS Global Insight, agreed with Cable that the BoE data showed "several worrying traits". Archer said: "The survey very much maintains concern that tight credit conditions could hold back the recovery. This is even allowing for the fact that ongoing muted bank lending to companies is being influenced significantly by low demand for credit in addition to restricted supply.


"Lack of access to credit for smaller businesses is still a serious problem despite some reports that it has risen slightly in recent months," said Archer.


The low level of activity in the mortgage market – where June's 48,000 approvals were the lowest since May 2009 – also prompted Archer to forecast that house prices would fall by 3% to 5% over the second half of the year

Bank Lending for Businesses Very Difficult to Get

Access to finance for businesses remains difficult, says IoD survey

Dated: 13 July 2010
New data released today by the Institute of Directors (IoD) reveals that businesses are still having difficulty accessing finance from their banks despite a fall in decline rates.
Key Findings

• 1 in 3 firms that applied for finance in the time period 1 January 2010 – June 2010 were declined by their bank.

• There is evidence that lending criteria have become more restrictive with regard to the amount of security requested by banks.

The Survey
From a survey of 899 company directors carried out at the beginning of June 2010 the IoD can reveal the following data:
Applications and decline rates for finance

• 39% of IoD members’ firms applied for finance with a bank (applications include requests for renewals/extensions/new requests for overdrafts and loans) in the time period 1 January 2010 – June 2010.

This compares with an application rate of 25% in our last survey, which covered the longer time period, 1 January 2009 to December 2009 (the survey was carried out in December).

• Of the 39% of IoD members’ firms which applied for finance in the time period 1 January 2010 – June 2010, 33% had an application for finance declined by a bank.

This compares with a decline rate of 57% in our last survey which covered the longer time period, 1 January 2009 to December 2009.
Security requested against loans

• 37% of IoD members stated that in the period 1 January 2010 – June 2010 they had noticed an increase in the amount of security being requested against any lending that their organisation sought.

This follows 29% of IoD members in our previous survey having noticed an increase in the period 1 January 2009 to December 2009. No respondents in the latest survey noticed a decrease in the amount of security being requested.

Commenting on the survey results, Miles Templeman, Director-General of the Institute of Directors, said:
“Although there is clear evidence of a drop in decline rates we’re still concerned that access to finance for businesses remains difficult. The survey indicates that some access problems relate to lending criteria becoming more restrictive with regard to the amount of security requested by banks. This raises a question about the functioning of the Government’s Enterprise Finance Guarantee scheme (EFG).

“The IoD would like the Government to clarify the relationship between the state-backed guarantee scheme and bank requirements for personal security. We continue to hear from IoD members who’ve had 75% of a loan underwritten through the EFG but who are still required by their bank to put up personal securities equivalent to over half of the loan value. Of course businesses should have some ‘skin in the game’, but this seems excessive.

“But we remain convinced that the best way to improve access to finance in the longer-term is getting a lot more competition into the banking sector. Only when firms can choose more easily where they can place their business and switch banks will we have a banking sector that is better focussed on the needs of business customers.”