Policymakers are encouraging banks to loosen their tight grip on lending to small businesses by extending a Bank of England Scheme.
The funding for lending initiative (FLS), which was launched in 2012 to try to get loans to cash-strapped businesses, has now been extended by two years to January 2018. The government hope it’ll help fuel economic growth.
Under the FLS, banks can access cheap loans on the condition they lend to businesses. However, the extension comes amid complaints from so-called challenger banks that they were not able to use the scheme as easily as established players. In 2014, more loans from small companies were repaid than new ones were granted leading to negative net lending. This was reversed in the first half of 2015.
The scheme grants allowances to each lender, which can be traded in at the Bank for credit. This is on cheaper terms than other loans. The amount of lending the bank has done determines the size of the allowance. Although banks will have more time to spend these allowances they will not be able to build up new ones unlike newer banks which will be given the opportunity. The Chancellor George Osborne has stated that this is to ensure that newer lenders are not at a competitive disadvantage.
Commenting on these changes to the scheme, Mark Carney, Governor of the Bank of England said:
“Since its launch in 2012, the FLS has provided an important source of funding support to banks, which has flowed through to improved credit conditions across the economy. As conditions have normalised for particular sectors over the life of the FLS, we have consistently reduced the scope of this temporary scheme and focused support where it is needed most. The announcement today continues that tapering, supporting continued improvement in SME credit conditions as the economic recovery takes hold, while gradually withdrawing that support over the next two years.”
The latest figures show that there is spare capacity as lenders had generated £57 billion of allowances, but £33.3 billion were, as yet, unused. Head of Businesscomparison.com, Philip Brennan, says it’s vital that SMEs access funding,
“It’s to be hoped that money from this scheme is made available to UK small and medium sized companies who really need it to start-up and grow their businesses. The FLS scheme has obviously had an impact on the housing industry with developers benefiting from the Help to Buy scheme. However, it’s much harder to see what has happened to commercial lending via banks which continues to fall to small businesses. The 5.4 million SMEs in the UK are vital to our economy. The banks need to get their act together as alternative lending is growing fast and offering a lifeline to businesses who are being rejected for funding from the banks. Not only are businesses being turned away for loans but overdraft facilities are declining.”