Banks may be offered 10 times access to cheaper loans as an incentive and leasing firms will be able to take part in scheme
George Osborne is switching the emphasis of his flagship lending scheme to small businesses by offering banks incentives to lend more to this credit-deprived sector.
As the Bank of England announced a year-long extension of the funding for lending scheme (FLS) to January 2015, it said banks lending to small businesses could be offered up to 10 times the access to the cheaper loans. Non-banks, such as leasing companies, will also be able to access the cheaper funding through the FLS for the first time.
The chancellor said the changes to the FLS, first introduced last summer to try to inject more credit into the ailing economy, would be a “big boost for the small and medium-sized businesses that are at the heart of the British economy”. He said there would be “no upper on the scheme” – which is being altered the day before the release of figures that will show whether the UK has plunged into an unprecedented triple dip recession and as he comes under pressure from the International Monetary Fund to ease the pace of his austerity measures.
The business secretary, Vince Cable, had been lobbying for the FLS, which has provided a fillip for the mortgage market, to have a more direct focus on small businesses. “More credit for small businesses is essential to building a stronger economy,” Cable said.
“Alongside the business bank that I am setting up, the funding for lending scheme is a targeted intervention to help deal with this problem. It is right that it is skewed towards the SME sector which has suffered the most from the credit crunch,” the business secretary added.
The Bank of England outlined three objectives for the new version of the FLS, which the Liberal Democrats had been arguing needed to be “put on steroids”. The first is to give banks and building societies confidence that it will be extended to January 2015, the second to increase the incentive for banks to lend to small businesses and to allow non-banks “which play an important role in providing finance to the real economy” to gain access to the cheaper funding.
The main change is for £1 of net lending to small businesses in 2014, banks will be able to draw £5 from the scheme, and to encourage them to start lending “sooner rather than later” every £1 of net lending to businesses during the remainder of 2013 will be worth £10 of initial borrowing allowance in 2014.
Sir Mervyn King, governor of the Bank of England, who is to retire in June, said banks would still need to the raise £25bn to bolster their capital cushions, which had been identified by the new Prudential Regulation Authority.
He said the change to the FLS “is valuable as it gives banks continued assurance against the risk that market funding rates increase”.
“Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised,” he added.
The Bank “has sought and received an assurance” from the government that the objectives of the extended FLS remain within its remit which is being reviewed at a time when it has been holding off from pouring more electronic money into the economy through quantitative easing.
Banks are charged an interest rate of 25 basis points a year – 0.25% – of the amount they access through the FLS but banks which reduce their lending while accessing the scheme are charged an additional 25 basis points for each 1% fall in lending.
The Bank said that while the FLS had already improved credit conditions “there remained risks of renewed stresses in bank funding markets, triggered for example by adverse developments in the euro area, which might undermine the recovery in credit conditions”.
But since the FLS was launched in the summer, some banks have withdrawn more credit from the economy than they have borrowed.