15 May 2012
Credit easing should go further
After Quantitative easing we now have Credit easing – also known as the Government’s ‘National Loan Guarantee Scheme’.
This has been introduced as part of Government policy to encourage growth by increasing bank funding to SMEs. The scheme offers a subsidy on borrowing to small businesses with a turnover of up to £50m.
The idea is that the Treasury will guarantee bank borrowing so that banks can borrow more cheaply and, in turn, offer lower interest rates on borrowing to SMEs.
Five banks are participating to start with – Aldermore, Barclays, Lloyds Banking Group, Royal Bank of Scotland and Santander UK. HSBC is a notable absentee, stating that it’s not ‘commercially viable’ as its cost of borrowing is already quite close to the government’s cost of borrowing.
Initially the Treasury will make £5bn of loans available and participating banks will offer them at a one percent discount to the standard lending rates that they would normally offer the SME.
It’s thought that the £5bn will be taken within six months, so a further £15bn is believed to be reserved, to be made available over the subsequent 18 months.
While this initiative will make borrowing cheaper for those companies that would already be able to get funding, it won’t release additional funds to support other businesses. The Treasury is not forcing banks to take greater risks when lending to businesses, so the total volume of lending to small businesses is not likely to increase as a result of this scheme.
Banks will control the process and, given the failure of Project Merlin, one has to ask why this initiative should prove a success?
SMEs have seen increased costs on arrangement fees and tougher requirements on loan collateral over the past few years and these are having a significant impact on borrowing decisions, which a 1% reduction in interest is unlikely to offset.
Surely it’s time to focus on how the banking sector is structured and come up with some helpful changes there, which could impact far more favourably on SMEs?
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