Repaying BoE loans could stifle SME lending

SCOTTISH small business leaders have warned of the dangers of a further freeze in credit if the Bank of England presses ahead with plans to get lenders to repay their central bank bail-out loans early.

The banks have already repaid 75 billion of the 185bn they borrowed as part of the BoE's special liquidity scheme (SLS), which was introduced at the height of the credit crunch.

But senior bankers said that Bank of England officials have urged them to have a "smooth transition" of repayments.

This would avoid what one banker called "the danger of a new refinancing rush causing money market turbulence" in the six months before the scheme officially ends in January 2012. That is three years after the first draw-down of the scheme.

However, Colin Borland, of the Federation of Small Business in Scotland, said that, while this might be logical to prevent any new meltdown in the financial markets, it could pose problems for cash-strapped small firms.

Borland said: "One presumes the Bank of England knows what it is doing. But if you take 185bn out of the system that might restrict their small business lending. Banks need to get the money from somewhere. If its going to the BoE it's not going to our members."

Borland said he was also concerned that an earlier payback of the banks bail-out could also have a "disproportionate effect" in Scotland.

"That's because we have two banks, Royal Bank of Scotland and Lloyds, with 75 per cent of the small business lending market in Scotland," he explained.

"They are already recapitalising, and so we would hope repaying the SLS early won't exacerbate matters for their small business customers."