April 12, 2013 / 1:32 PM / 6 years ago

Banks reluctant to lend to small firms - government report

LONDON (Reuters) - Britain’s banks are less willing than before the financial crisis to take the risk of lending to small businesses, a government-commissioned research report said on Friday.

Britain's Business Secretary Vince Cable delivers a speech during a business forum at St James Palace in London November 2, 2012. REUTERS/Suzanne Plunkett

Small business lending is a sensitive political topic in Britain. The Bank of England and politicians say a lack of bank lending is part of the reason for the country’s very slow recovery from the financial crisis.

Banks say that weak lending growth is largely due to firms’ unwillingness to invest in an uncertain economic climate, not a reluctance to lend on their part.

However, a new report from the National Institute of Economic and Social Research, Britain’s leading macro-economic think tank, seems to contradict this.

“We control for firm risk and other relevant characteristics in our analysis and still find rejection rates for bank loans are generally higher in 2011-12 than 2008-9,” said NIESR.

The report was commissioned by Britain’s department for business, innovation and skills, whose minister, Liberal Democrat Vince Cable, has been a regular critic of banks and has urged the Bank to do more to boost business lending.

In the middle of last year the government and the central bank set up the Funding for Lending Scheme, which offers banks cheap finance if they maintain or increase lending to households and businesses.

Much of the benefit so far appears to be going to home-buyers rather than small businesses, and although the scheme is in its early days, Cable has asked the central bank to look at ways to change this.

Earlier this week the Bank official in charge, Paul Fisher, appeared to agree with NIESR on bank lending, telling a Scottish newspaper that major banks’ credit assessments may still be “too severe”.

NIESR said low-risk small businesses seemed to have borne the brunt of banks’ “credit rationing”, which took place through higher overdraft interest rates and outright rejection of loans.

However, there was also evidence that banks’ reluctance to lend reflected an attempt to reverse poor lending decisions made in the run-up to the 2007/08 financial crisis, NIESR added.

NIESR published only summary findings of its research on Friday. The full report will be released at 12:00 p.m. on Monday.

Editing by Jeremy Gaunt.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below