By Professor David Llewellyn
Figures released by the Bank of England reveal that the five main UK banks have missed targets for lending to smaller businesses (SMEs) by more than £1 billion.
Under Project Merlin, Barclays, HSBC, Lloyds Banking Group, RBS and Santander UK, were to make it easier for smaller firms to access credit. While the latest figures show an increase in overall lending, only £74.9bn was loaned to SMEs — less than the government’s £76bn target.
“SMEs are particularly dependent on banks for financing," Loughborough University’s Professor David Llewellyn said.
"Because of the recession, and the capital and liquidity constraints faced by banks, the government has sought to avoid a credit crunch in SME lending through the Merlin project. However, it has not proved very successful.”
Banks have blamed the poor economic backdrop and fewer firms coming forward for credit, while the Federation of Small Businesses (FSB) has criticised the scheme it says meant “that money is going to bigger businesses and not new and fledgling firms that need it.” The FSB’s own survey indicates SMEs as more likely to obtain finance through savings or friends and family, rather than bank credit.
“The five Merlin banks fell short of the £76bn target largely due to weak lending by the state-owned Royal Bank of Scotland,” explained Professor Llewellyn. “The position is in fact worse than that because net lending (i.e. new money) to SMEs declined last year by £10bn and the cost of loans to SMEs rose.”
Project Merlin will not be repeated this year. Instead, the government is negotiating with banks over a national loans guarantee scheme it hopes will increase the flow of bank lending to the SME sector and lower the cost of loans by up to 1%. “But what is really needed,” urged Professor Llewellyn, “is more competition in the market for SME lending as over 80% of such loans are made by only five banks.”
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