Call to scrap Merlin as banks miss loans target

A LEADING figure in Scottish business has called for the lending agreement made by Britain’s five main banking houses to be scrapped after the banks missed stringent UK government targets on lending to small firms.

Colin Borland, of the Federation of Small Businesses (FSB) in Scotland, said that the Project Merlin deal had “failed” and, after the banks signed-up to the deal, fell short of the £76 billion lending target for small and medium-sized enterprises (SMEs) during 2011.

The Bank of England’s confirmation yesterday that £74.9bn was loaned to SMEs last year, led to senior SNP MSP John Wilson, the deputy head of Holyrood’s economy committee, demanding financial penalties for institutions that had failed to meet the targets agreed with the Chancellor.

There was also a 3 per cent drop in net lending in the final quarter of 2011 by the five banks – Lloyds Banking Group, Royal Bank of Scotland, Santander, Barclays and HSBC – according to the figures published yesterday. A spokesman for the five banks blamed a “weak” demand for credit from firms. They insisted that institutions would “encourage customers to come forward with borrowing proposals” in the coming year.

However, Mr Borland, head of external affairs for the FSB in Scotland, said that the Bank of England figures on lending did not “inspire confidence” among Scottish businesses.

He said: “These figures are less than helpful and show that the situation in terms of banks lending has not really changed since last year. If the banks agree a target like this, it’s hugely disappointing when it isn’t achieved and certainly doesn’t inspire confidence.

“The Merlin agreement had failed, but the targets are really a distraction and what we need is a new agreement to replace Merlin which focuses on practical measures to make credit and other financial products available to firms.

“There needs to be a wider reform of the banking sector, so that institutions start to take a longer-term view of what sort of finance business needs.”

Mr Wilson called on UK ministers to use the Westminster government’s financial muscle to force banks to stick to lending targets by threatening to withdraw financial guarantees the Treasury has made to prop up certain institutions.

He said: “It’s clear from these figures that the UK government has failed in its attempts to induce banks to increase their lending to banks.

“The UK government has to take more of a hands-on approach to ensure that agreements on lending are kept. When there is a failure to meet targets, there must be no other option but to take sanctions against the banks.

“That should include the UK government saying that it will withdraw financial guarantees for banks.”

Conservative MSP Murdo Fraser, the convener of Holyrood’s economy committee, said that the five main banks were “under an obligation” to lend more to help boost the small business sector, due to the use of taxpayers’ cash in institutions such as RBS and Lloyds.

Mr Fraser said: “It’s disappointing that the targets have not been met by these major banks, as the struggle that many firms face to obtain the necessary finance is undoubtedly holding back economic growth and business expansion.

“If the targets are not met, then the UK government must sit down with the banks, who are under an obligation to meet these demands because of the sums of public money that have gone into supporting the banking sector.”

Scotland’s finance secretary, John Swinney, claimed that the UK government’s figures did not set out “what the situation is” north of the Border over banks lending to firms. He said: “These figures show that SMEs are continuing to find it difficult to secure affordable funding and that’s extremely disappointing. The UK government has to take immediate action on this issue to allow viable businesses to grow and support jobs.

“We are also concerned about the lack of information available on lending in different parts of the UK, despite the issue being raised with the UK government on several occasions.

“The figures published today are aggregated headline figures only – it is therefore not possible to ascertain whether Scottish businesses or SMEs have received proportionate lending under Project Merlin.

“It is essential that we have access to this information to allow us to establish exactly what the situation is in Scotland.”

Cathy Jamieson, Scottish Labour’s Treasury spokeswoman, attacked Project Merlin as a “total failure”.

She said: “Rather than free up money to lend to small businesses like David Cameron boasted, Project Merlin has achieved the exact opposite and its total failure to support small firms has cost jobs in Scotland.

“Small businesses are the lifeblood of our economy and we need urgent action to boost bank lending if we are to get things moving again and create jobs.”

Tardes Union Council general secretary Brendan Barber said: “Project Merlin has failed on two counts – the banks have not increased lending sufficiently and the Chancellor has failed to exert any influence, even on the banks that are majority-owned by taxpayers. Increasing bank lending to businesses is absolutely vital to creating jobs and getting our economy moving again.

“But despite his highly-spun showdown with the banks last year, the Chancellor has caved in and let them off the hook.”

Matthew Fell, CBI director for competitive markets, said: “There is no doubt that regulatory changes and higher wholesale funding costs have in part constrained banks’ ability to lend, so we need to look at a wider range of funding models that will help better match supply and demand.

“That is why it’s so important that the government implements the proposed credit easing scheme as soon as possible.”

A spokesman for the five Merlin banks said: “The banks’ efforts to encourage customers to come forward with borrowing proposals are set against this overall challenging economic environment. The business demand for credit remains weak.”

However, Downing Street yesterday said that the Merlin project would take “some time for things to return to normal” after the financial crisis”.

A spokesman said: “All of this reflects the fact that we are facing a challenging time in our economy, and the fact that we have been through a very severe financial crisis that has had a significant effect on the banking sector and the flow of credit, not just in this country but around the world.

“It’s going to take some time for things to return to normal.”