Further Declines in Lending to SMEs

The Bank of England’s Funding for Lending Scheme (FLS), introduced by the Treasury in 2012 to incentivise banks and financial institutions to boost their lending to the UK economy, has released disappointing figures showing SME lending has fallen for a consecutive quarter.

Although a number of institutions had actually increased their lending to smaller enterprises during the quarter (such as, Lloyds by £384m, Santander by £99m, Aldermore by £118m and Investec by £136m), net funding to SMEs in the three months to June 2014 fell by £435m due to markedly larger declines at RBS (£360m), Nationwide (£501m) and Clydesdale (£439m).

This coupled with the previous quarter’s fall of £723m shows a worrying decline in the funding available for small to medium sized businesses in the UK at present.

The scheme has been heavily criticised in industry, as much of the cash that the participating banks were able to borrow cheaply from the Bank of England was lent as mortgages to individuals, rather than business loans. Last November, the governor of the Bank of England, Mark Carney, implemented further incentives to encourage banks to lend to SMEs: for every £1 lent to SMEs, five times that amount could be drawn down at an even lower interest rate. The further contraction in SME lending in the second quarter of this year is a disappointing result from a scheme which has been refocused specifically to boost the flow of credit in this vital sector of the economy.

Although two of the largest commercial banks, Barclays and HSBC, are not currently participating in the FLS, and so total UK lending to SMEs cannot accurately be measured through the reported figures, it is clear, as John Longworth of the British Chambers of Commerce comments, that ‘much more needs to be done’ in order for smaller firms to access the finance they need to prosper and grow.

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