Chancellor to extend the flagship £80bn scheme to specifically target banks that lend to small businesses
George Osborne is expected to expand his flagship £80bn lending scheme on Wednesday in a bid to boost support for small businesses following criticism that most of the funds have been siphoned off by high street banks to cut homeowner’s mortgage costs.
The chancellor plans to extend the Funding for Lending Scheme (FLS) to specifically target banks that lend to small businesses, which are currently starved of credit.
It is understood the Bank of England, which administers the scheme, has drawn up plans to expand the scope of the FLS to cover invoice finance houses and leasing firms. The scheme, which will be extended for a year until January 2015, will also offer lower interest rates to financial firms that can prove they are lending to small businesses following lobbying by the business secretary, Vince Cable.
Business leaders welcomed the move, which they said was needed to compensate for the high cost and scarcity of loans to small and medium-sized businesses.
Terry Scuoler, chief executive of EEF, which represents manufacturing firms, said: “Expanding lending to SMEs is the right call. Strengthening incentives for banks to lend to SMEs and other finance providers marks a step forward in addressing the problems faced by smaller firms in accessing credit on the right terms. Giving FLS a longer shelf life is also a helpful move.”
But he warned about the need for “greater transparency in reporting the impact of FLS on lending to SMEs” and “a more concerted effort to promote FLS to businesses, many of which have disengaged from banks”.
Pressure has mounted on the chancellor and Threadneedle Street to boost lending with unconventional measures following the reluctance of the central bank’s monetary policy committee to boost the current £375bn quantitative easing (QE) programme
The Bank held off another dose of QE earlier this month, and some economists believe it will wait until the arrival of new governor Mark Carney in July to resume asset purchases.
The FLS announcement will come a day before the publication of official figures that are expected to show Britain narrowly avoided a triple-dip recession in the first quarter of the year. Analysts have predicted 0.1% growth in the three months to the end of April.
Funding for Lending is one of the main vehicles the chancellor has chosen to expand lending, which until now has channelled funds through high street banks to the wider economy.
The scheme provides discounted funds to the major banks, which they must pass on to customers when they approve loans.
However, since the scheme got under way last summer, several banks – including Royal Bank of Scotland, Lloyds and Santander – have withdrawn more loans from business than they have approved. And critics have claimed that much of the new lending has gone to homeowners in the form of cheaper mortgages.
Bank figures last week showed net lending to companies slumped by £4.8bn in the three months to the end of February, declining by £2.8bn in February alone.
A Bank survey also showed that while credit availability has improved for big and medium-sized firms, small businesses still struggle to access funds. The same survey predicted “significant increases” in demand for credit from small and large firms in coming months.
Policymakers at the Bank recently said they saw “merit” in boosting the FLS, and Osborne said at last month’s budget that the Treasury and Bank were debating how to extend the scheme.
The new scheme will allow small businesses to sidestep high street banks in favour of “second tier” invoice houses and leasing firms, many of which have struggled to offer loans since the banking crash, when access to international money markets dried up.
The Bank’s new move comes after the new archbishop of Canterbury warned on Monday night that Britain was mired in an economic depression and called for a breakup of a major bank in order to create regional lenders.
The Bank of England declined to give details ahead of a formal announcement.