Last month, the government announced ‘Project Merlin' its accord with the banks. The most important idea was to get more credit flowing to businesses that needed it. As we said at the time, while we support the intent, we are less than enchanted with what Merlin agreed.
Bank of England data for December 2010 showed that the net change in loans to businesses was negative again. This means that credit in net terms fell back in 10 out of 12 months last year. Interestingly Merlin avoided a net lending target and instead focused on gross lending, perfectly consistent as Vince Cable said in March last year with credit being withdrawn from SMEs who need it.
Today, we have further evidence suggesting access to finance remains a serious issue. Our survey, amongst others covered by the FT, the Guardian, and the Independent, shows that while there has been a modest improvement in the availability of finance this has been outweighed by rising costs. Problems remain most acute for small firms.
The slight improvement in the proportion of companies reporting an increase in the cost of credit in 2010q4 has reversed over the past two months. The balance of companies reporting an increase in the overall cost of credit jumped to 32% from 19%.
In good news, our survey shows that over a quarter of manufacturers expects their demand for external finance to increase in the next twelve months. But this is another source of pressure for 2012 that is already shaping as a crunch year because of the banks' own refinancing needs. Without an improvement in costs and fees on lending, access to finance threatens to be a drag on investment and growth.
Our survey also shows that conditions are diverging for companies with smaller companies faring noticeably worse than larger companies. Fees on existing borrowing over the last two months illustrates this well:
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 actually saw a decrease.
There isn't a big bang solution that we see being able to fix companies' credit difficulties overnight. However, our survey offers another opportunity to highlight meaningful actions that together and over time will make a difference.
We think it's important that with its Growth Review, the Budget, and, later in the year, the Independent Commission on Banking's recommendations, the government doesn't take its eye off the ball on access to finance. In particular it should consider:
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. Improving the customer services and perception of banks by enhancing banks' own customer services commitments through establishing a robust, transparent, and independent system for monitoring their adherence to good lending principles;
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 markets