Funding for Lending comes under greater scrutiny due to poor figures for SME lending in the second quarter
Lending to Small and Medium enterprises (SMEs) continued to fall in the second quarter, casting further obscurity over the validity of the state-backed Funding for Lending Scheme (FLS).
The governmentís flagship lending scheme underwent a revamp, with the intention of addressing the lack of cash afforded to SMEs as they bid to establish themselves as self-sustainable companies, through state provision of credit for banks in exchange for increased lending to these smaller enterprises.
However, net lending to SMEs plummeted by £435m in the second quarter, which comes after a £719m drop in the first quarter, according to the Bank of Englandís latest data. Moreover, a mere £3.2bn was taken from the FLS scheme for the second quarter.
Net lending to all companies fell by £3.9bn in the second quarter, as even corporate mammoths received £3.5bn less than they did in the first quarter.
The FLS scheme allows banks to borrow £5 from the BoE in exchange for £1 net lending to SMEs; the government hoped this would provide SMEs with the impetus needed to realise their potential and in doing so indirectly bolster the economy.
36 banks participated in the scheme, and of this number 26 failed to record positive lending figures to SMEs, with Nationwide displaying the worst net lending to SMEs for the second quarter. Lloyds, however, bucked the trend and produced positive lending of £384m to SMEs for the second quarter whilst declaring net lending which rose in excess of £1bn for the first 6 months of 2014. Sources at Lloyds pointed to the 1% discount tendered to all of its SME customers as the stimulus for their superior results.
However, this miniscule success was not enough in the grand scheme of lending to mollify business groupsí disgruntlement at the perceived lack of success of FLS.
“Despite the welcome re-focus towards SME lending, the real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses,” said John Longworth, director general of the British Chambers of Commerce.
“Unfortunately many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential.”
The Bank of England insisted that positives ought to be drawn from the reduced tightening of net lending to SMEs by almost £300m across the first two quarters. It also pointed out that banks reluctance to distribute loans to small estate agents skewed the data, painting an imbalanced picture of the FLS.
The Bank said on Thursday: “Some of the weakness in bank lending to smaller businesses, which has persisted despite the fall in bank funding costs, may reflect weaker demand. The FLS extension will continue to support lending to SMEs in 2014.”
Both Santander and Virgin money are other winners from FLS, the former taking £500m whilst the later raked in £600m during the second quarter, however only Santander upped its lending levels to both SMEs and corporate giants, further enhancing its increasingly respectable reputation.