The data published on Monday showed a continuation in the fourth quarter of the trend of broadly flat lending growth. In the three months to the end of December, participants made FLS drawdowns of £9.5 billion, bringing the amount borrowed under the scheme to £13.8 billion. Net lending by FLS participants during the quarter fell by £2.4 billion, a disappointing figure slightly mitigated by seasonal factors.
For many bankers, the slow take-up of new loans since the FLS scheme was launched in August is the result of caution among company executives unwilling to take risks in a challenging economic environment. In addition, they say, record levels of cash on corporate balance sheets offset the need for loans.
Companies on the other hand say the FLS has reduced the cost of bank borrowing, but those saving are not being passed on, and banks are clawing back income in arrangement fees and other costs.
“Borrowing rates for banks are low but you will be hard pressed to find loans at anything like the levels bank borrow at,” says Priyen Patel, a policy adviser at the Federation of Small Businesses (FSB). “Arrangement fees, meanwhile, are high and there are numerous other little things which make the process arduous.”
A survey of FSB members who had taken part in the FLS late last year found that one-in-three were offered rates of between 4% and 5%, while one-in-10 were offered rates of 5% to 6%, says Patel, with fees on top.
More broadly, many corporate applications are rejected for spurious reasons, says Patel, citing a study published last year which showed SMEs might be getting a raw deal. Russel Griggs, former chair of the Confederation of British Industry’s SME council, found that nearly 40% of appeals made to banks about credit applications in the year to April 2012 resulted in lenders modifying their decisions.
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| Bank of England deputy governor Paul Tucker |
“What that shows is that in four out of 10 rejections for loans, when banks actually look at those decisions, they found they were wrong,” says Patel. Still, while corporates focus on the hurdles to obtaining loans, banks have a different perspective. RBS says that applications for SME loans fell by 10% from the third to the fourth quarter, while many treasurers have been offered loans that have not been drawn down.
“We have £1.4 billion of loans waiting to be drawn down, so in that respect we have an issue with demand,” says Nigel Owen, RBS’s head of SME media. “Over the course of 2012, we saw loan applications fall by 19%.”
Because of the reduced borrowing costs obtained under the FLS, the bank has cut the price of loans by up to 1.7%, says Owen, and since August some 16,000 SME customers had benefited from the scheme, saving around £50 million in interest costs.
“Quite a few businesses have benefited, but the biggest reason for companies not borrowing right now is that they are concerned about the economic outlook,” he says. “We are into the fourth year of deleveraging and it’s going to take a while to turn that process around.”
Certainly, it might be too early to judge the FLS, given the limited amount of data available and the time it takes for corporate loans agreements to be put in place. However, some have questioned whether the scheme is fit for purpose and secretary of state for business Vince Cable has called on the BoE to conduct a review.
“There is a suspicion that the FLS provides cheap funding which the banks are more comfortable putting into their mortgage businesses, and it may be that the BoE needs to do something to make it more skewed to corporate lending,” says David Tinsley, UK economist at BNP Paribas. “Another idea would be to do something on the macro prudential level to make risk weights on lending to corporates more attractive.”
One thing the BoE could do is tweak the collateral requirement for the FLS, bringing it more in line with the European Central Bank.
“Changing the collateral requirements is something they might do, but it’s unlikely in the very short term,” says Mohit Kumar, a rates strategist at Deutsche Bank in London. “We are more likely to see more quantitative easing first.”
Another idea mooted by BoE deputy governor Paul Tucker is that the BoE should introduce negative interest rates for deposits, making banks pay for leaving money on deposit to encourage higher levels of lending.
Before the BoE makes any move, it is likely to want to see more data on the performance of the FLS. In addition, it might be that the causes of slow lending growth are more complex than a simple reckoning of supply and demand.
“One reason that businesses are not going to banks is because there is tension there and a trust issue,” says FSB’s Patel. “For example, businesses may be concerned that if they ask for money the banks may look at existing terms to their detriment.”