Today's announcement of lending targets with the major banks have not gone far enough to address the fundamental issues facing businesses looking to access finance for growth.
While there are some helpful measures, especially Bank of England scrutiny of the targets, we have had lending agreements in the past and they have either been missed (net targets in 2009) or met (gross targets 2010) without material alleviation in the access problems faced by SMEs. Also, as in the past, the targets will prove to be unenforceable.
The announcement also fails to address the flaws that we see as still remaining:
- a lack of competition in the banking sector;
- more alternative sources of finance aside from banks, both debt and equity.
- a need for greater transparency in lending decisions;
- and better real business knowledge in the financial sector.
Competition is important both in terms of the service business customers receive and also lending decisions going forward. Many new companies have had their first big break from a bank looking to enter the market.
Alternative sources of finance have in many cases been choked off by the era of cheap credit leading up to the financial crisis. Private lending, mezzanine debt finance, venture capital, and private equity all need to be boosted to help the economy grow.
Transparency on the lending principles applied and adhered to by banks - and a credible way for monitoring banks sticking to this are important to strengthen the relationships between banks and SME business customers. This is a two way relationship and banks promises to address customer relations in their Taskforce report was welcome. Firms need to respond too by making sure they give their relationship with the bank the attention it needs.
Better knowledge of how businesses, like manufacturing, work should improve both the substance and the perception of how banks, fund managers, and investors decide to inject capital. Again it is encouraging to hear that many banks are looking to build their in-house expertise of the UK manufacturing sector.