Lending sinks £2.3bn since launch of BoE scheme

The Bank of England is confident that a revamp of its flagship scheme to ease the flow of credit will deliver a boost for cash-strapped small firms, despite new figures showing a sharp drop in net lending since the initiative was launched.

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Although net lending among the banks and building societies taking part in the Funding for Lending scheme (FLS) totalled £1.6 billion in the three months to June, that could not reverse the £4bn contraction seen during the previous two quarters.

The FLS, launched in July 2012, offers discounted funds to banks on condition that they pass on the benefits to households and businesses. Since it went live, 28 lenders have taken more than £17.5bn from the scheme, but net lending shrank by £2.3bn, with much of the fall blamed on major banks running down their “non-core” loan books.

A recently-announced overhaul of the programme will let banks access more funding if they ramp up lending to small firms, and today the Bank of England said: “A large proportion of FLS participants have indicated their intention to participate in the extended scheme.”

However, the Federation of Small Businesses said less than a third of its members were aware of the initiative. Scottish policy convenor Andy Willox, right, added: “We hope that the tweaks to the scheme announced in April will encourage more lending to the small business community.”

Paul Fisher, the Bank’s executive director for markets, said credit conditions are improving and FLS participants “expect net lending volumes to pick up over the remainder of this year”.

However, Phil Orford, chief executive of the Forum of Private Business, described today’s figures as “disappointing” and said: “This perception gap risks disabling the access to finance that is vital to supporting growth and getting Britain trading at pre-2008 levels.”

Nationwide Building Society was the biggest net lender in the second quarter, with a figure of almost £2.3bn, taking its total to £7bn since the FLS went live.

Barclays has tapped £6bn from the initiative and has delivered net lending of £7.5bn in the past year, including £668 million in the three months to June.

While Lloyds Banking Group lent almost £1.3bn in the second quarter, total net lending has shrunk by more than £5.3bn over the year, despite withdrawing £3bn from the FLS. The group, 39 per cent owned by the taxpayer, said its lending to SMEs grew by 5 per cent in the year to June.

At fellow state-backed lender Royal Bank of Scotland, which has taken £750m from the FLS, net lending shrank by almost £2.8bn in the second quarter, while Santander’s figure fell by more than £1.7bn and Clydesdale saw an £838m contraction.