In the past two months there has been some improvement in the availability of finance, but this has been outweighed by rising costs, with problems remaining most acute for small firms, according to a major survey published today.
The survey, published by EEF, the manufacturers’ organisation is the first on bank lending to businesses in 2011 to be published since the Project Merlin announcement last month. Having seen a slight fall in the proportion of companies reporting an increase in the cost of credit towards the end of last year, conditions have gone into reverse over the past two months. The balance of companies reporting an increase in the overall cost of credit jumped to 32% from 19% in 2010q4. This negates any positive news on the modest pick up in the balance of companies reporting increased availability of both new and existing lines of credit.
Separately the survey also shows that over a quarter of manufacturers expect their demand for external finance to increase in the next twelve months. Without a corresponding improvement in costs and fees on lending, EEF believes credit constraints will threaten to be a drag on growth and deter vitally needed business investment.
Commenting, EEF Chief Economist, Lee Hopley, said:
“The improvement we saw in lending towards the end of last year seems to have been short-lived.
While there appears to have been some easing in availability, for many smaller companies the question is still ‘at what cost and under what terms and conditions?’. It is far from clear that, for small manufacturers in particular, we are on the path to easier access to more affordable finance. As a result there appears to remain a gap between the aspirations of Project Merlin and the reality on the ground.
“Until we start to see measurable progress on both cost and availability of credit, access to finance will remain the weak link in the government's strategy for growth. This will require addressing the underlying issues of increasing competition in the banking sector and improving its understanding and relationship with industry."
According to the survey, over a third of companies had seen a significant or moderate increase in the cost of new finance from banks or other lending providers in the first quarter of this year. Two thirds had seen no change, whilst just over 3% had seen a decrease.
Fees on existing borrowing over the last two months illustrate the divergence in conditions faced by companies of different sizes. The proportion of small companies seeing an increase in fees on existing borrowing increased to 32% up from 17% in the previous quarter with none reporting a decrease. By constrast only 6% of large companies reported a rise in the past two months and a similar proportion of large companies actually saw a decrease.
EEF used the data to re-iterate its call for the following key measures to be addressed through the Growth Review and by the Independent Banking Commission.
1. Increasing competition in the SME banking sector through ensuring action on any recommendations from the Independent Commission on Banking not only strengthen the banking system but improve possibilities for further entrants into the market;
2. Improve the customer services (relationship management and engagement) and perception of Banks by enhancing the Banks' own customer services commitments through establishing a robust, transparent, and independent system for monitoring their adherence to good lending principles and assessing alleged breaches
3. Encourage development of alternative sources of finance especially non-bank debt and venture capital;
4. Improve knowledge of how to assess risks and returns in real businesses in the financial sector – for example by improving understanding of supply chains and export.