George Osborne’s flagship is threatening to become a ‘huge white elephant’

George Osborne: Scottish capital project funding is welcome news
George Osborne: Scottish capital project funding is welcome news
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THE coalition government’s flagship scheme to kick-start the economy by increasing lending to businesses and consumers has been dubbed a “white elephant” after figures showed less than £500 million in extra cash has been passed on by banks.

The Funding for Lending scheme (FLS) offers discounted loans to banks on the condition that they pass them on to the wider economy, but the Bank of England said Barclays was the only major bank to increase lending during the three months to 30 September, with an extra £3.8 billion going to businesses and households.

A total of 35 banks and building societies have signed up to the FLS since it went live on 1 August, with six of the UK’s largest lenders taking up almost £4.4bn in cheap funds, but net lending grew by just £496m in the three months to September.

Net lending at Lloyds Banking Group contracted by almost £2.8bn, while fellow state-backed lender Royal Bank of Scotland saw a £642m decrease and Santander’s figure was down £3.8bn.

RBS said it has used the FLS to cut rates on small business loans by up to 1.7 per cent, and the fall in its lending figure was due to “planned loan run-offs” in commercial property and non-core areas. The group said “core” net lending to firms and households rose by £412m in the third quarter.

Lloyds, the first bank to tap into the FLS with a £1bn drawdown in September, said it plans to access a further £2bn under the scheme.

Investec analyst Ian Gordon said: “Lest we forget, Lloyds has promised to keep shrinking its core lending book until mid-2013. At least Barclays is positioned to grow. George Osborne can be thankful for that.”

When he launched the scheme earlier this year, the Chancellor said the FLS would provide “welcome support to households and businesses at a challenging time for the UK economy”, but critics claimed the initiative has done little to encourage lending.

Christopher Shaw, chief executive of alternative finance provider Platform Black, said: “The choice of name has proved to be unintentionally ironic. The funding is there all right, but there’s precious little lending going on.

“What launched as the Bank of England’s great white hope risks looking like a white elephant.”

The Bank of England stressed that it was too early to tell whether the FLS was having a marked impact on lending conditions, but Paul Fisher, the Bank’s executive director for markets, said he was confident it would help.

He added: “Since the scheme was announced, we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions.”

The CBI’s director for competitive markets, Matthew Fell, said the FLS “appeared to be making inroads” in the housing market – a view backed by the Council of Mortgage Lenders – but “we need to see a big push so that it makes a difference in the business lending market”.

Fell added: “Raising awareness of Funding for Lending to give firms confidence to approach their banks will be critical to its success. We urge the government to push ahead with its plans for a business bank, including an advice centre so that SMEs can learn about finance schemes and get the help they need to grow.”