Analysis: To lend or not to lend, that is the question

THE banks are effectively caught between a rock and a hard place as they are being told to lend more while at the same time being expected not to let credit to get out of control again.

The UK’s economy did not look particularly buoyant last year and as a result the banks have been less likely to take risks with lending to businesses.

Perhaps the best solution to the problem is to wait and see what happens with the economy this year, before deciding to redesign the agreement between banks about how much they are committed to lend. The hope has to be that there will be many more good business plans put before banks this year.

That could lead to an increase in the amount of credit that is available for small and medium- sized businesses.

However, if the worrying level of bank lending continues, this will obviously have a negative affect on the economy in terms of reduced economic activity and prosperity.

Any growth that does come in bank lending is likely to be at a very slow level, which would still leave a lot of businesses struggling to get credit .

It is very difficult for Project Merlin to know how good the prospects of the businesses trying to get banks loan last year actually were.

It may therefore be true to say that banks are not seeing good enough prospects from those coming before them with business proposals and asking them for loans.

But it is probably too early at this stage to be talking about an immediate alternative to Project Merlin, as we need to see how the economy develops this year.

If the economy starts to perform a bit better than we may start to see improved results in terms of increased lending by these banks.

At the same time it’s likely to be a crucial year for Project Merlin, as a continuation of these relatively poor figure will lead to more questions being asked about the agreement, both in terms of the banks themselves and the UK government.

• David Bell is professor of economics at Stirling University.