Martin Flanagan: Merlin’s wings have been well and truly clipped

Published on Tuesday 14 February 2012 00:00

MERLIN’s spell didn’t work. The UK’s five biggest banks have admitted that they failed to meet their UK government targets for lending to small business under Project Merlin last year by more than £1 billion.

It takes the gloss off the banks’ performance in beating their wider target for lending to all businesses by some £25bn because small and medium-sized firms are keystone in getting the economy going again and pushing unemployment down.

But you can interpret the figures variously, which was always the weakness at the heart of Merlin – a project meant to make the government look tough on our out‑of‑favour banks after the state aid and Bank of England lifelines they received.

Most crucially, you can lead an SME to water, but you can’t make it drink. Lots of small firms have chosen to pay down their debts in recent years as the UK economy has oscillated between stagnation and recession.

And you can’t blame them. The financial caution of small business has only mirrored millions of households in thinking now is not the time to take on more debt.

You can have all the lending targets you want but if the target market is not playing ball there is not too much banks can do about it.

Equally, it was predictable that the British Bankers Association would home in on the better wider business lending figure, claiming it showed how committed the industry was to lending, not hoarding, capital.

Meanwhile, the CBI employers’ federation has recognised that the banks have also been constrained in their lending by regulatory changes and higher wholesale funding costs.

On the other hand, many small businesses claim it is the onerous conditions attached to bank loans as much as their availability that is seeing lending go begging.

The Forum of Private Business, for instance, says many of its members look to loans from family and friends, or even credit cards, rather than access finance from high street lenders.

Relationship banking has become something of a wishy‑washy cliche. Far better, in practical terms, for banks to make small business loans cheaper and simpler to understand, with less of the small print that puts companies off borrowing more to invest more.

Merlin won’t be repeated this year. I don’t think it will be mourned. It has become a political football. People always saw straight through the difference between gross lending and net lending, anyway.

There is always something a little disingenuous about gross lending as it cannot give an accurate snapshot of how far the economy is being turned around by loans.

The Treasury is replacing Merlin with a £20bn loan guarantee scheme and it is important this comes in quickly. The idea is sound.

If operated well, the new credit easing scheme will have two advantages. It will provide alternative finance to the small businesses that particularly need it (many of the big corporates are sitting on big cash piles, anyway).

And the competition could encourage banks to loosen their lending criteria a little as well.

Is Amazon going to be brought to book?

IN SOME ways, I’m surprised hostilities have not started before now. Book retailers in the US are striking back at Amazon, the internet giant posing a threat to their businesses. Apparently some of them have retaliated to their lunch being eaten by Amazon by refusing to sell books from the company’s recently launched publishing arm.

Barnes & Noble, America’s biggest bookseller by sales, is refusing to stock books published by Amazon in its stores as the online retailer makes increasingly aggressive forays into publishing. Indigo Books & Music, a big Canadian chain, has done likewise.

I don’t think the book retailers will be able to stick their finger in the online dyke. But it would be strange if they didn’t try to hit back at the over‑mighty Amazon in some way. It is human nature to fight back against a bonfire of their book businesses.

The retail chains are particularly miffed that Amazon is trying to sign exclusive deals with authors that prevent other retailers selling digital versions of their books. That’s restriction of trade.

It will be interesting to see if the new confrontation across the internet/print divide makes the passage across the Atlantic.

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