A potted history of recent UK access to finance interventions... | EEF

A potted history of recent UK access to finance interventions...

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Last week the government announced the latest in its rolling series of interventions to improve access to finance for SMEs from the banking sector - the Funding for Lending Scheme.

It's another scheme, which luckily for the government, does not involve spending any additional money but rather using the 'strength of the balance sheet', a way of announcing initiatives without breaking the Fiscal Mandate the government has set for itself.

There's been several attempts from the government to improve access to finance, particularly for SMEs, in the banking sector since the onset of the financial crisis. But with a difficult external demand environment it's proving a tough nut to crack and I wouldn't bet on us being at the end of the road yet.

In the depths of the (first dip) of the recession in early 2009, the government announced the Enterprise Finance Guarantee (EFG). This is a revamped version of an older scheme, the Small Firms Loan Guarantee, and seeks to improve access to finance for firms that have run out of security to post with the banks. In return for a fee, the government guaranteed part of these SMEs' loans in the event of default, making lenders more willing to lend.

EFG suffered a little from poor communication from Whitehall and the banks' head offices to the bank branches that delivered it. Firms also mistakenly believed it would give them the ability to borrow without any security, rather than helping them access finance when they had insufficient security.

The scheme has been continued by the Coalition and as of end of March this year, over 15,000 loans worth over £1.5 billion had been drawn down.

Labour also sought to use its shareholdings in RBS and Lloyds to gain agreements from those banks to increase their lending to business. Alistair Darling tried this first on a net basis (net of repayments that is) for 2009/10 - but the targets were missed by a long margin; with RBS and Lloyds contracting their net lending by £41 billion rather than expanding it by £27 billion.

So for the 2010/11 year, Darling sought an agreement for these banks to expand gross lending by £90 billion. Then we had an election.

The coalition took gross lending further with its 'Project Merlin' agreement in February 2011. This sucked in all the major banks rather than just RBS and Lloyds but kept with the gross targets - despite Vince Cable panning the value of these prior to the election. HSBC, Barclays, Santander, RBS, and Lloyds agreed to lend £190 billion in 11/12 - £85 billion of which was to be to SMEs.

The overall target was achieved; the SME target was narrowly missed. But the gross target for lending was clearly missing the mark. Each bank seemed to have a different way of counting its contribution to the target. Some counted undrawn facilities, some counted unrequested extensions to existing facilities. Clearly this was not quite in the spirit of getting more funding into the real economy. And of course because lending has been contracting on a net basis since 2009, meeting these targets or not wasn't really suggesting expanding volumes of investment.

With some justification the banks point out that they cannot control how much their SME customers pay down existing debt, making it hard to commit to a net target. But some banks clearly saw it as possible and pushed hard to expand lending on a net basis even though this was not part of Project Merlin.

The assessment of the Project Merlin targets did not receive quite the fanfare the government gave to the original launch. By this time its thinking had moved on and, in March this year, we were on the cusp of the National Loan Guarantee Scheme.

The National Loan Guarantee Scheme seemed to me to be the first time the government recognised that something needed to change in terms of the supply-side of access to finance. We'd been making noise about the cost and terms and conditions on finance all through 2011 on the back of our quarterly Credit Conditions Survey.

The banks and to a lesser extent the government had instead emphasised problems on the demand side. There are undoubtedly problems on the demand-side - weakness in markets, some lack of understanding of the right types of finance - but for us this was never the complete picture.

The NLGS allows banks to benefit from a government guarantee for tranches of their borrowing, allowing a one percentage point savings to be passed on to SME customers on the interest rate they pay on their lending. This is a slightly tricky idea for companies to get their head around because it's a 1pp cut on what they would otherwise have faced - not a 1pp cut on what they might be borrowing at now. Lending costs are going up for banks for a variety of other reasons that could swamp the impact of this cut.

Barely three months since the NLGS was announced and the government, this time with the Bank of England, has gone further with the Funding for Lending Scheme. Unlike previous interventions, the Funding for Lending scheme offers explicit incentives for increasing net lending. The Bank of England lends UK government gilts to banks in exchange for a fee. The fee is low so long as net lending expands - and progressively rises if net lending contracts - for each individual institution.

So that's a whirlwind tour through what the government has done so far to boost access to finance for SMEs. But with the rate of change you would hardly bet this is the end of the story.

We're putting our thoughts together at the moment on what the government needs to do to deliver a more sustainable improvement for SMEs. Different groups have bandied about the possibility of a new state-sponsored bank, perhaps focused on SMEs, perhaps to provide growth capital, or support innovation. Competition in banking is another focus of discussion. We'll be shortly putting forward on our thoughts in this space.


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