Banks slow to ease access to business as loans get dearer

Published on Thursday 2 July 2009 21:20

LENDING to credit-starved businesses has not risen as fast as hoped for during the past three months, the Bank of England has revealed.

In its latest Credit Conditions Survey, the Bank reported that overall credit availability to business had increased in the three months to mid-June, "though by less than expected". The report will raise new concerns among business over the promises by UK banks to free up lending.

Lenders have been expected to increase loans to households and firms over the next three months due to cheaper and more available funding. There have also been pledges by part-nationalised Lloyds Banking Group and Royal Bank of Scotland as conditions of taxpayer support.

But the report reveals that spread, or margin, on corporate and household lending rose during the period – making them dearer – and survey respondents expect a further widening in spreads on business loans ahead.

The Bank highlighted that a small balance of lenders has increased slightly the availability of secured loans, such as mortgages, to households since March. Lenders said they were also expecting a further rise in credit availability over the next three months, supported by higher risk appetite.

The report said: "Credit availability to high loan-to-value borrowers was expected to improve and lenders anticipated a slight easing in credit scoring criteria for granting loan applications. The economic outlook was expected to bear down less on credit availability over the next three months."

But the survey struck a further gloomy note in reporting that lenders had clamped down further on credit card loans, seen rising default rates, and were braced for more bad debts in the months to come.

CBI Scotland assistant director David Lonsdale said: "This is consistent with our own member surveys, which show that while access to finance and its cost remain a real issue for many firms, the fierce grip that the credit crunch has wrought of late on commerce is weakening."

Lonsdale added: "Expectations of a sizeable spike in lending are probably unrealistic in the short term as banks seek to repair their balance sheets and profitability, and tackle rising levels of bad debt.

"This may help explain why some firms have been interested in tapping the equity markets for funds, and the growing realisation that retained profits will play a larger role in funding firms' investment plans."

Given the increased importance of retained profits and cash flow, CBI Scotland has been lobbying government for a range of measures to help business. These include the deferment of this year's "bumper rise" in business rates, prompt payment of supplier invoices by the public sector and for transitional rates relief to be implemented when the new commercial property re-evaluations and bills come into effect in next spring.

85M BOOST FOR ENTREPRENEURS

A NEW multi-million euro fund has been set up by the European Commission to help budding entrepreneurs to establish small businesses during the economic downturn.

The 100 million (85m) facility will provide "micro-credit" – relatively small sums of money – to would-be business owners.

It will be available to people who have lost their jobs during the recession or may otherwise have difficulty accessing financing.

EU employment and social affairs commissioner Vladimr Špidla said: "The economic crisis will lead to 3.5 million job losses in the EU this year. The financial crisis has dried up credit to those wishing to start or develop their own businesses.

"In the current recession, we want to offer a new start to the unemployed through easier access to credit to set up or develop new businesses. And we want to help small businesses to develop further despite the crisis."