Ministers warn banks to increase the amount of loans to businesses
Politicians are lining up to throw further criticism at the banks after it was announced by the Bank of England that lending to firms fell by a record amount in the second quarter. Lending to non financial firms dropped by £14.7bn compared with the same quarter in 2008 and is the largest single fall since records began in 1997. This appears to be at odds with the banks claims during their half year reporting that they had responded to requests to increase lending to businesses.
Vince Cable, Liberal Democrat Shadow Chancellor was fuming and said that it was a scandal for banks to withdraw credit or increase interest rates when good businesses are struggling. He cited that people would be angry that recently announced bumper profits by a few banks was leading to many businesses suffering by being unable to access credit.
The Conservatives also railed in on Chancellor Darling and Prime Minister Brown for not providing the support that had been promised or not halting the bonus culture which appeared to be creeping back in whilst businesses fail.
Detailed figures issued by the Bank of England show that lending to construction was down £2.1bn, £4.5bn to manufacturing and £6.3bn to wholesale and retail businesses. Even lending to legal, accountancy and consulting firms dropped by £2.7bn.
At the end of July, Chancellor Darling was urging banks to lend more to business to help them get through the recession and gear up for recovery. The British Bankers Association issued data showing that lending to small business rose £391m in June, up from £133m in May. However, it appears that these lending figures included loans to financial institutions and masked what was really happening to the general non financial business sector.
Mr Darling also expressed concern that banks were charging too much for their credit, making loans unaffordable. Whilst adding that he wanted to make sure that bank lending was properly and fairly priced, he shied away from the idea that government should dictate how banks should lend.
Angela Knight, chief executive of the British Bankers Association, tried to defend the banks pricing policies by saying that the wholesale cost of funds on the markets was much higher than bank base rate. She also said that it was proper to make sure that companies could demonstrate that they had the ability to repay their loans before lending took place. In many cases, she said, business plans did not add up.
The Federation of Small Business supported the Chancellor's efforts to get banks lending and on fair terms. Stephen Alambris, chief spokesman for the Federation, said that businesses need to be able to benefit from the current period of historically low rates.
The British Chambers of Commerce was also keen to add its weight to the discussion by saying that it would be business that would lead us out of recession and that access to appropriate funding was essential to make that happen.
But Philip Hammond, Shadow Chief Secretary to the Treasury, was keen to lay some of the blames at the government as well as the banks. He claims that Chancellor Darling has been, "asleep on the job" and that his rhetoric will be taken "with a pinch of salt" by the public at large.
Lloyds Banking Group and RBS have both benefited significantly from the emergency funding given by the government to help stabilise the banking sector. The tax payer is a large shareholder in both institutions. HSBC and Barclays have benefited indirectly but did not take direct state aid.
Natwest, owned by RBS, has produced a guide for businesses in which it outlines what it information expects them to have when they come in to discuss lending. It said that it has made an additional £3bn of funds available for small and medium sized businesses.
Cold comfort for the members of the British Retail Consortium. Their Quarterly Credit Conditions Monitor for June showed that almost a fifth of large retailers and a third of small and medium sized retailers had had their bank lending reduced in the last three months. Almost two thirds of retailers who took part in the survey said that they had laid off staff and that the lack of funding had hindered their ability to trade. Stock levels had reduced in ¾ of retailers. But it was also the reduction in their ability to get trade credit that was a concern. Half of retailers said that cover had been withdrawn or reduced - leading to problems with suppliers. Jane Milne of the British Retail Consortium warned that having the right stock levels was important as the valuable Christmas trading period approaches