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Questions still to be answered on bank lending

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The commitment by the major banks, announced as part of the Project Merlin deal struck with the Government, to increase lending to smaller firms has been broadly welcomed, but questions remain, insist small business organisations.

Under the terms of the agreement, brokered between the Government and the leading banks, there should be extra funds available for small business lending.

Last year, some £179 billion was loaned to businesses.

The total lending target for 2011 is to be £190 billion, provided demand matches the figures.

Of this total, some £76 billion is to be targeted at smaller firms, a 15 per cent increase on last year.

It has been a frequently voiced complaint that small enterprises have been struggling since the recession to secure finance and affordable credit from the banks.

However, the Federation of Small Businesses (FSB) has argued that more needs to be done to change the structure of banking in the UK to promote growth. 

While accepting the lending pledge as a welcome step, the FSB said that time would tell how tell how the agreement would work.

Recent FSB survey figures have showed that around 84 per cent of small businesses are not approaching the bank for credit, either because they have already been refused or because the cost is too high. And firms which do use the banks as their main source of finance are being penalised by high interest rates at a time when the base rate is at an all time low.

The FSB wants more competition in the banking sector and a restructuring that would create a more stable environment.  

John Walker, the FSB’s national chairman, said: “The announcement should not be allowed to let the Government or the banks off the hook, and is a preamble to what we hope will be bigger announcements from the Independent Banking Commission. While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the sector.  

“Many small firms aren’t going to the banks to access finance and credit and the main problem they face is the cost of credit.  Many small businesses have lost faith in the sector and are looking at other means of finance – and it is the smallest of firms that need finance most. 

“To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but the commitments – as with previous lending targets – are unenforceable.”

Phil Orford, chief executive of the Forum of Private Business (FPB), argued that the banks must readdress the risk criteria they set for loan applications and must use more relevant financial information when making lending decisions.

Mr Orford said: “The banks say demand is down. They say applications are running at an 80 per cent acceptance rate. If this is the case, how do they intend to increase lending to small firms by 15 per cent?

“I believe the answer is that they must review risk criteria and be less punitive on viability assessments – and make a particular effort to cut down on sector-based discrimination.

“The banks must be more proactive in securing up-to-date financial information from their clients and they need to communicate more clearly to applicants what the key assessment criteria are, so applications are more compliant with the lenders’ needs.”

He added: “The message now to all small businesses is that the banks have committed to lend more. Test them on their commitment and get your applications in.”

David Frost, the director general of the British Chambers of Commerce (BCC), pointed to unclear decision-making and over-centralised processes as major problems when it comes to bank lending to smaller firms.

Mr Frost said: “Throughout the recession and its aftermath, businesses have told us that their relationships with lenders have suffered tremendous strain. Poor or opaque decision-making, over-centralised processes and a lack of good relationship managers on the ground have caused a crisis of confidence between business and the banks. These problems are still all too real to small- and medium-sized companies across the UK.

“While the big banks’ renewed commitment to small business lending is welcome, ministers and the banks need to focus their energy on improving frontline services for SMEs. Without clear lending processes and more sensible decision-making at a local level, many businesses will still be reluctant to ask for loans and big net lending targets won’t be met.”