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Banks: Lending

Volume 717: debated on Thursday 25 February 2010


Asked By

To ask Her Majesty’s Government what assessment they have made of the level of bank lending to small and medium-sized enterprises.

My Lords, data supplied to my department by the four main lenders to small and medium-sized enterprises show that demand for finance remains subdued, with the number of applications in the final quarter of 2009 some 25 per cent down on the early 2008 high. However, the value of loans drawn in the final quarter of 2009 was more than 7 per cent up on the previous quarter, and the majority of businesses applying for support continue to access the finance that they require. Loans totalling more than £690 million have been drawn down by nearly 7,000 businesses under the Government’s enterprise finance guarantee, and that is lending that would not otherwise have occurred.

My Lords, I thank the Minister for that Answer but can I press him further? Is he aware of the recent survey by the Institute of Directors which shows that nearly 60 per cent of applications for finance by directors seeking bank finance in 2009 were rejected by the banks and that 20 per cent of the businesses surveyed are to some extent funding their businesses with credit cards? Does he not agree that these figures challenge the central claims made by the UK banks, the latest being made by RBS this week, that, where demand exists for bank finance, the majority of that demand is being met? Does he also not agree that we have been making this point from these Benches for the past 12 months?

My Lords, it is difficult to assemble an absolutely clear and stable picture of exactly what is going on. Surveys undertaken by my own department show that around three-quarters of businesses get finance from the first source they approach. The data indicate that current approval rates for loans and overdrafts are around 66 per cent for businesses with a turnover of up to £1 million and close to 90 per cent for those with a turnover of between £1 million and £25 million. Those figures for this first quarter are up or stable compared with the fourth quarter of 2009. However, I readily accept and acknowledge that the general perception of bank lending among SMEs is, frankly, more negative than these figures indicate. In these circumstances, I strongly urge the banks to be both more communicative and more competitive in their approach to lending to SMEs.

My Lords, how does the Secretary of State respond to the new data from the Institute of Directors, in which I declare an interest as a member, which found that, despite government assurances that businesses found to be ineligible for commercial credit would be offered access to the enterprise finance guarantee, 83 per cent of those found so ineligible were not even offered information on that scheme?

My Lords, I am not aware of the information to which the noble Lord refers, although I shall make sure that it is supplied to me by my department. Obviously, that would create concern in my mind. I can only say that the principal problem that we have in the economy is a lack of demand for lending rather than a lack of supply. As the recovery gathers strength during this year and next, the demand problem might become more of a supply problem, and that is why we have to be very vigilant about the approach, practices and behaviour of the banks in relation to the corporate sector.

My Lords, given the imperative need of small firms for ease of access to finance, will my noble friend satisfy himself that the excellent legislation on late payment, introduced over a number of years by his Government, is properly observed and monitored in both the private and public sectors to ensure that small firms do indeed get ready access and that their cash flow is not compromised?

My noble friend raises a very important point. That is why I have been extremely active right from the beginning of the financial crisis and during the ensuing recession to make sure that at least in the public sector, and in central government in particular, we observe a 10-day limit for the payment of invoices to SMEs. By and large, that is the benchmark that central government has operated, largely successfully, and of course we want to spread that good practice right across the public sector.

Recently, I have received signs that private sector businesses are seeking to extend—not lessen—the time period over which invoices are paid. I say to larger businesses that they have a responsibility to the rest of the corporate sector and a particular responsibility to their supply chain to ensure that their cash flow and viability are properly sustained. I say to them, “They form exactly the supply chain you will need in future years, so do not, through your actions, start to put so much pressure on them that you put them out of business”.

My Lords, a moment ago, the Secretary of State referred to the fact that there is a lack of demand for borrowing. I suggest to him that in fact the problem is the hurdles which people have to overcome, such as very high interests rates, bureaucracy, new charges, audits, facility fees, reviews and management fees. Does he agree that many of those hurdles are new and that they discourage small businesses from borrowing?

My Lords, the noble Lord has put his finger on a very real problem. It is one that I raised earlier this week when, with the Chancellor, I met all the CEOs of all the retail banks. I am only too well aware that businesses continue to raise concerns, not just about the availability of credit but about the pricing of that credit. Increased loan pricing can be attributable to the need for retail banks to repair their balance sheets, given the disrepair they got into in the past; to the increased cost of funding for the banks, which is driven by market conditions; and to new and proposed regulation, such as the FSA’s liquidity requirements. In other words, safer banks, which we all welcome, may not be cheaper lending banks as a result of some of the regulation that has been introduced. In my view, that points out the need for regulators to be conscious of the full consequences of their actions both for the banks and the businesses which rely on them.