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Bank Lending (Small Businesses)

Volume 529: debated on Thursday 9 June 2011

Figures published in May by the Bank of England show that the UK’s five largest banks lent £16.8 billion to UK small and medium-sized enterprises in the first quarter. That fails to meet the targets in the Merlin agreement and is obviously disappointing. We will continue to monitor lending closely over the year. We reserve the right to revisit the agreement if banks continue to miss the targets.

Many small businesses in my constituency complain that when they ask banks about funding, they are told not to bother applying because it would only attract interest in their existing facilities and that those may well be withdrawn instead. What can the Government do to stop banks doing that and then claiming that they cannot meet the targets they have agreed to because of a lack of applications?

There is a lot of evidence that some banks are genuinely trying to change their culture of lending. I referred to that point in a productive exchange in the Business, Innovation and Skills Committee yesterday. The banks have come forward with a new code of practice to be operated through the British Bankers Association, which allows, for example, for a banking ombudsman to deal with complaints of the kind to which the hon. Gentleman rightly referred.

There is a genuinely difficult problem of trying to get highly over-extended banks to lend to small and medium-sized businesses. The Secretary of State was very critical of the previous Government’s performance on this issue. He said that the banks ran rings around that Government. Given that the first indications on Project Merlin show a £2.2 billion shortfall between what the banks are doing and what the Government agreed they would do, how would he describe the performance of his Government on bank lending?

Of the leading Merlin banks, two have met their targets, which demonstrates that the demand is there for banks that are able and willing to change their culture of lending. Of course, we have taken the previous Government’s arrangements further by bringing private banks that are not owned wholly or partly by the taxpayer into the agreement. They are undoubtedly taking it seriously, and we are making it absolutely clear that we expect the agreement to be delivered and that the volume of lending to SMEs will increase.

Will my right hon. Friend reassure us that he is ready to do a little more than just monitor this situation? In particular, he should not allow banks to get away with the excuse that the demand is not there, when it is the price of the loan and the terms attached to it that are so often too difficult for struggling small businesses who need the credit.

My hon. Friend is right that there is a problem of discouraged demand. We have just launched a major survey to drill down a little further into the complex facts of bank lending and to find out how serious the problem of discouraged demand actually is. However, this is not just a question of monitoring the situation. A key element of the Merlin agreement is that senior executives in the banks will have their remuneration linked to their performance on small business lending. I am currently insisting that they provide more information about how those incentives work.

The Secretary of State must realise that the Merlin agreement is a busted flush and that no good is coming from it. The continuing failure of the banking sector to meet the minimum targets, meaning that there continues to be no new net lending, is really not acceptable. As the hon. Member for Sevenoaks (Michael Fallon) has just said, the terms and conditions for the loans that are being made are often very penal. Can the Secretary of State get into that? There is no point in monitoring it; we want him to examine what is going on and to come forward with concrete proposals to improve the situation.

That is exactly what I am doing, as I explained to the right hon. Member for Wolverhampton South East (Mr McFadden). Before the hon. Member for Coventry North West (Mr Robinson) writes off what we are doing, he should consider the undoubted benefits that have already flowed from it. The banks have put £2.5 billion into the business growth fund to provide equity, which is the kind of issue that he was exercised about when he was a Treasury Minister. That problem has now been dealt with.

The Forum of Private Business is calling for a return to the traditional bank manager model, and some banks are in fact now doing that. What can we do to encourage banks to give small businesses individual attention, increase the autonomy of bank managers to make decisions and get rid of the culture of “computer says no”?

My colleague puts the point extremely well. What we are dealing with is not a short-term problem but the long-term issue of how to change the culture of banks. One bank in particular, Lloyds, which I think I mentioned yesterday, already has SME lending on its monthly board meeting agendas, and the system of incentives is being changed to create more of that type of relationship management. Crucially, there are new banks entering the market that have exactly the focus that she describes. Competition, ultimately, will help to solve the problem in a major way.

We were told that monitoring would be carried out with the assistance of the Bank of England, yet the Governor himself said in March:

“We’re not monitoring. What we are doing is putting up on our website the data that banks submit after a fairly cursory plausibility check.”

The Secretary of State also mentioned CEO pay, which we were told would be linked to the lending targets, yet he failed to check how that would be delivered before he finalised Merlin. Is it any wonder that the banks are already failing to meet their obligations, when the Secretary of State waved through an agreement without teeth?

First, I congratulate the hon. Gentleman on his new role on the Front Bench. He is a very articulate commentator on economic matters, and I look forward to exchanging views with him.

The Bank of England plays an important role in the monitoring process. Of course the banks’ data are aggregated, but the Bank provides an independent assessment of progress under the agreement, which is important to the credibility of that agreement. Of course, it has pointed out that there has been a failure of lending in the first quarter.

On the wider question of meeting lending objectives, we were assured when the Merlin agreement was signed that senior executives’ incentives would mean that their remuneration was significantly greater than the share of small business lending on their balance sheets. We are now trying to establish in detail exactly what that means for individuals, and we have insisted that more lending be forthcoming.