UK: Funding for Lending Scheme still failing to boost loans to business

Lending to business Lloyds Banking Group and Royal Bank of Scotland has fallen, according to new fig

Lending to business Lloyds Banking Group and Royal Bank of Scotland has fallen, according to new figures - Credit: PA

Lenders continued to shrink loans to businesses despite drawing down billions from a flagship scheme designed to revitalise Britain’s sluggish economy, figures revealed today.

Banks and building societies participating in the Funding for Lending Scheme (FLS) shrunk net lending by £300million in the first quarter of the year, although the pace of lending decline eased from three months earlier.

Part-nationalised Lloyds Banking Group lent almost £1billion less during the quarter, despite having borrowed £3 billion from the Bank of England and Treasury scheme.

Taxpayer-backed Royal Bank of Scotland also shrunk its net lending by £1.6bn in the quarter, but has borrowed £750m from the scheme.

The bank said lending to homeowners has been positive but continues to fall to business. It added it will “take time” for the scheme to feed through to bigger lending volumes.

Steve Elsom, area director for Lloyds TSB Commercial Banking in East Anglia, said lending by the bank to small and medium sized firms and to first -time byers in the region had increased.

“The acid test for the Funding for Lending Scheme’s success is whether we are lending to SMEs and First Time Buyers,” he said.

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“We have been growing our SME lending by 10.80% a year on a net basis in East Anglia and we have also pledged to increase our new lending to first time buyers to £6.5bn in 2013 compared to £6bn last year.

“But as part of our effort to focus on these fundamental parts of the economy we are running down certain ‘non-core’ parts of our business.

“The decline in our overall lending in the first three months of 2013 as reported in the latest Bank of England figures, is entirely the result of this shift in focus and the figures show a reducing rate of decline, which demonstrates the progress we are making towards achieving overall growth in our lending this year.”

Nationally, the 40 participating lenders have so far drawn £16.5bn from the scheme, after borrowing an extra £2.6bn from the FLS during the quarter, while their lending has shrunk by a net £1.8bn since the FLS was launched in August.

The Bank of England blamed the credit squeeze on lenders shrinking their “non-core” portfolios, such as commercial property loans.

Spanish-owned bank Santander cut its net lending by £2.3 billion as it continued its retreat from riskier parts of the mortgage market.

The FLS was recently beefed up to extend more loans to credit-starved small businesses after criticism over its impact. The scheme offers lenders discounted loans in return for boosting the flow of credit to the economy.

The pace of lending decline slowed from a net £2.4bn decrease in the final three months of 2012, and the Bank of England said net lending should pick up and turn “modestly positive” over the rest of the year.

Paul Fisher, executive director for markets, said the net lending fall was “broadly as expected”.

He added: “The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013.”

The Bank of England did not split out lending to homebuyers and businesses, but said flows to individuals have been “typically positive”, while credit to businesses has “mostly been negative”. However, it added net lending to companies is “less negative” than a year ago.

Royal Bank of Scotland (RBS) said it continues to “punch above our weight” on lending to businesses.

A spokesman said: “RBS has increased lending to the real economy by nearly £1 billion in the first quarter of 2013, which includes a £600 million increase in our business lending - our strongest performance since the scheme launched.”

Nationwide Building Society also increased its lending by £1.2bn after drawing £2.5bn from the scheme.

There were also major credit injections from firms including Tesco Bank, Virgin Money and Coventry Building Society.

The British Bankers’ Association (BBA) added the FLS has cut the cost of borrowing for businesses, and companies remain reluctant to borrow because of the tough economy.

“In difficult economic times businesses are choosing to pay down debts rather than take on more borrowing,” said BBA chief executive Anthony Browne. Barclays, which has borrowed £6bn from the FLS, increased its lending by £1.1bn during the quarter.

However, the scheme was criticised for failing to boost credit to businesses.

John Longworth, director general of the British Chambers of Commerce (BCC), said: “The real test for Funding for Lending is whether it is able to get credit flowing to young and fast-growing businesses.

“Unfortunately many of these growth firms are still being left out in the cold when it comes to accessing finance, which prevents them from expanding, creating jobs and helping to drive a business-led recovery.”

TUC general secretary Frances O’Grady added: “The Funding for Lending scheme is not providing the support small businesses need in these tough economic times.

“It seems that some banks are just using the Funding for Lending to improve their capital position. This is why we need a properly resourced state investment bank that can provide the assistance firms need to grow and create jobs.”