Martin's Mailbox: The blame game

Martin's Mailbox: The blame game


There has been no shortage of ideas and initiatives to get lending moving again but has it helped? Apparently not… if you believe a new survey just published by the British Chamber of Commerce (BCC). According to its findings, half of companies surveyed said they mistrust the UK’s financial institutions; 40 per cent are not confident they could secure finance from external providers; and the general level of awareness of government support schemes is low.

The official statistics back up the BCC’s survey and make for uncomfortable reading for any businessman reliant on credit for future expansion. According to latest data from the Bank of England (BoE), lending to companies fell by £1.2 billion in August – down 3.2 per cent on the year. The growth in credit being made available to UK business has now been in negative territory for more than three years!

For their part the banks argue it is not their responsibility to finance high-risk enterprises, and that demand from well-established companies with a verifiable track record remains stubbornly low. They also argue, perhaps more convincingly, that regulatory changes are forcing them to hold cash back in an effort to shore up their battered balance sheets. The regulators – the BoE and soon-to-be morphed FSA – counter that banks should not hide behind tighter regulations as a reason not to lend.

So who’s right? Are the regulators turning the screws too tight at the risk of choking off the liquidity the market needs; or are the banks now so risk-averse that even highly reputable and competent businesses are seen as unworthy of lending to? Or have we as a society been so badly burned by the events of 2008 that we’ve finally been weaned off our borrowing addiction?

The government claims it is doing all it can to stimulate lending – or at least lending to the right type of borrower. In August it launched the Funding for Lending scheme (FLS) with the objective of making it easier for businesses to access affordable finance. As I predicted in an earlier blog, its impact, so far, has been decidedly underwhelming.

While the availability of mortgage finance has risen slightly, lending to corporate entities continues to flat line. Borrowing costs – a key target for FLS – remain relatively high with the average spread over Bank Base Rate (0.5 per cent) on business loans worth less than £1 million, moving down only marginally from 3.37 per cent in July to 3.36 per cent in August. The average figure between 2008 and 2011 was 2.64 per cent.

The BoE argues it is not reasonable to expect too much from FLS so soon after launch. Perhaps, but even the top brass at the banks admit the scheme is more likely to benefit private consumers than businesses. They point to data from their own trade body – the British Bankers’ Association – indicating that SMEs are focused on reducing their indebtedness rather than adding to it. According to such data, small and medium-sized companies borrowed £6.1 billion in the first quarter of 2012 but repaid £6.4 billion of existing loans. But why then are lending spreads still so high? Surely if companies aren’t borrowing we would expect to see rates much lower than those now on offer?

There can be no doubt that the banks are under pressure on a number of fronts. They had been too reckless in the past and must now make amends. The authorities are demanding they reform their practices and behaviour, while simultaneously imposing tighter capital adequacy requirements. And it may indeed be partly true that some of the more credit-worthy customers are not looking to borrow to invest until the economic outlook improves.

Whatever the reasons, I refer back to my conclusions in last week’s blog that mainstream lending is unlikely to return to its pre-2008 levels anytime soon, if at all. Our economy will have to adjust to the new reality. In doing so, there will be significant opportunities for alternative lenders, and their partners, to flourish. The key is to select the right opportunity and in getting the risk-reward component spot on. The day of the lending cavalier is past; long live the roundhead financier.

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