Give the Government a gold medal

By: John Sollars

Date: 6 September 2012

Give the Government a gold medal /Gold medalWith all the Olympic hype in the media you may have missed a less glamorous initiative that got off the starting blocks on 1 August.

The new flagship Funding for Lending (FLS) scheme was launched to replace the National Loan Guarantee Scheme. The FLS is another attempt by the Government to encourage banks to lend to growing businesses.

In its March 2012 budget, the Coalition announced that it would be setting up a new credit-easing plan called the National Loan Guarantee Scheme. The NGLS was designed to help businesses access cheaper finance, by reducing the cost of borrowing under the scheme by 1 percentage point. It guaranteed £20bn worth of loans. Since March, only 16,000 loans were applied for, equalling a total of £2.5bn. This has been declared a failure, and so the Treasury has sidelined that plan and come up with another bright idea in the form of the FLS.

Loans worth £80bn have been pledged for the FLS. The scheme will run for the next 18 months (1 August 2012 to 31 January 2014) and then it will then be assessed. Under the scheme, for every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the FLS. Those banks that reduce lending will have to pay higher fees to use the scheme.

According to the Bank of England, the FLS is "designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies". Under the initiative, commercial banks will be able to exchange collateral, such as existing loans, for pieces of paper known as “Treasury bills”, on which they will pay an interest rate of 0.25%. They will then be able to use these bills as backing with which to borrow cash cheaply on the wholesale markets, money they can then lend to businesses and homeowners.

The purpose of the Bank of England's scheme is not just to inject some life into the moribund property market, but also to make cheaper loans available to small and medium-sized firms who are outside the financial sector. SMEs have complained for several years that the banks are hoarding cash rather than lending – even to relatively safe borrowers.

Official figures show that lending to non-financial firms has indeed been falling, a trend that the Bank of England would like to reverse. In the past four years the stock of outstanding loans to such companies has shrunk by 17% from its peak, to £420bn in June this year. At the start of August, the RBS group (which includes NatWest) announced that it will take advantage of the new scheme and cut £2.5bn off the loan interest charges it expects to make available to SMEs.

If this means that start-ups and SMEs are able to access the funds that they have been desperate for since the banking crisis of 2007/8, then we should award the Government a gold medal for providing an impetus for business growth.

John Sollars is MD of printer ink retailer

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