April 23, 2013 / 12:28 PM / 5 years ago

UK to extend flagship credit scheme to boost lending

LONDON (Reuters) - Britain will announce a shake-up of its Funding for Lending Scheme on Wednesday in the hope of getting more credit flowing to small and medium-sized firms and kick-starting an economy struggling to show any growth.

Pedestrians walk past the Bank of England in the City of London February 23, 2013. REUTERS/Neil Hall

The Bank of England said it would make an announcement at 0500 GMT. It gave no further details but sources familiar with the scheme said it would be extended both in scope and duration.

With little room for manoeuvre on fiscal policy and top officials at the central bank deadlocked over extending their government bond-buying scheme, Britain’s government is pinning its hopes on alternative means of boosting growth.

The original FLS was launched last August and offers banks cheap credit if they increase lending to households and businesses. Results have been mixed with benefits so far mainly going to banks and homebuyers rather than small businesses.

Chancellor George Osborne is under pressure to find ways to boost the economy. Last week the International Monetary Fund added its voice to calls for new thinking to help growth.

Under Wednesday’s shake-up, the pool of lenders able to access cheap funding is likely to be extended to include leasing firms and asset finance groups which are major sources of credit for small businesses, the sources said.

Among the changes, big banks will be allowed to lend to such alternative financing firms as part of credit targets set for participation in the FLS scheme, one of the sources said.

Also, banks which want to use the scheme may be asked to spell out how much they are lending to small businesses.

The deadline for funds to be drawn down will be extended by a year to 2015, sources said.

Brian Hilliard, UK economist at Societe Generale said it was a sensible idea to target the funding subsidy at the institutions closest to small businesses, but that lack of lending was both a supply and a demand issue.

“Expectations should be modest about what it will do for growth in the short term,” he said.

Official data shows that banks and building societies drew down nearly 14 billion pounds under the Funding for Lending Scheme between August and December. But overall lending fell - in part because of seasonal factors, and the desire of some banks to reduce lending to meet tougher capital rules.

The central bank argues that the scheme is a success, and without it lending would have fallen by much more. Critics claim there are better ways to support growth, and a bigger response is needed to counter the deleveraging being undertaken by banks, households and the public sector.

British government bond prices underperformed German bunds after the announcement as investors bet a freeing up of credit would make a further gilt-buying spree from the central bank less likely.

“Better-targeted policies ... naturally means this kind of credit easing over quantitative easing,” said Nomura economist Philip Rush.

Non-bank lenders, he said, might be able to make better use of the scheme since they were less encumbered by bad debts and onerous capital requirements.

Changes to the scheme have been expected for several days.

Osborne said on Friday he would announce changes to the scheme “fairly shortly” - in part due to concerns that its benefits were not reaching small businesses rapidly. And the trade body for British leasing companies, the Finance & Leasing Association, told Reuters on Monday it was in talks with the government about extending the scheme to cover more firms in the sector.

Additional reporting by Olesya Dmitracova and William Schomberg; Editing by Catherine Evans, Ron Askew

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