LONDON (Reuters) - British banks plan to boost the supply of credit in the first quarter of 2013, a survey found, showing how a new Bank of England scheme is addressing a problem that many blame for holding back the economy.
Banks polled for the Bank's quarterly Credit Conditions Survey said they would significantly increase the availability of mortgages in the first three months of 2013 after a record rise in the three months to December 11.
They also plan to expand the availability of corporate loans after the supply of this type of credit rose late last year at the fastest pace since records began in 2007.
"The Funding for Lending Scheme was widely cited as contributing towards the (latest) increase in secured and corporate credit availability," the Bank said on Thursday.
The central bank and many British politicians say a shortage of business and mortgage lending may be a major reason for the slowness of the country's recovery from the financial crisis.
Although data on Wednesday revealed an unexpected pick-up in factory activity in December, figures on Thursday showed that construction activity fell at its fastest pace in six months.
Separate official data, also released on Thursday, showed a 0.2 percent fall in British labour productivity in the third quarter of 2012, with a related measure sinking to its lowest level since 2005.
Some Bank officials have said weak productivity may be partly to do with a lack of credit to enable firms to shift into more profitable lines of business.
The FLS, which opened for business in August, is designed to resolve this, and offers British banks and building societies cheap finance if they increase lending to businesses or households.
Earlier Bank data showed that lenders drew down 4.36 billion pounds from the scheme in its first two months, in what analysts said was a moderately encouraging start.
The latest figures suggest the trend is continuing, though there is yet to be a major increase in the number of mortgages approved or in business lending.
"(Thursday's survey) suggested that the Funding for Lending Scheme is working," said Jens Larsen, an economist at RBC Capital Markets, adding that it also eased the pressure for more bond purchases or quantitative easing from the central bank.
"Conditional on the current outlook, we do not expect further asset purchases."
In a further positive sign, the survey pointed to an improvement in terms on which loans are extended. Banks said spreads on mortgages would tighten significantly in Q1 after a big squeeze in Q4, driven by cheaper funding from the FLS and higher competition between lenders.
Lenders also expected an increase in maximum loan-to-value ratios.
But improvement in lending terms for businesses was patchier. Spreads on loans to large and medium-sized firms narrowed substantially in late 2012 but remained broadly unchanged for small firms and the trend was likely to continue in early 2013, the poll showed.
"Smaller companies may not benefit as much as larger and medium-sized firms, which would be disappointing given that it is a lack of available and affordable credit to smaller companies that has been of particular concern," said Howard Archer, economist at IHS Global Insight.
On Friday the Bank will release November data on lending to Britain's consumers, which is expected to show a tick-up in mortgage lending and approvals.
editing by Ron Askew