Member Article

Lending scheme to help business and households

A new scheme to make £80 billion of loans more accessible and cheaper for businesses and housholds, has been unveiled by Chancellor George Osborne and Bank of England Governor Mervyn King.

The Funding for Lending scheme allows banks to access more and cheaper funds to pass on to businesses and households over the next 18 months. It is part of efforts to help lift the UK economy out of recession.

However, previous schemes to increase lending since the financial crisis, have failed to boost the economy. But Mr Osborne and the Bank of England insist the scheme will be different to previous schemes, as it ties banks access to the scheme, and cost of using it, directly to whether they raise total lending to British firms and households.

John Cridland, CBI Director General, said: “This new scheme should provide a real incentive for banks and building societies to increase their lending to businesses and individuals, if possible at lower rates of interest.

“It is a positive step towards stabilising funding for lending, particularly given the current market turmoil driven by the Eurozone crisis.”

He added: “Smaller businesses I talk to are concerned with cost of borrowing as well as with its availability. Funding for Lending will help the transition to a ‘new normal’, where structural changes in banking, driven by capital and liquidity reforms, are impacting on business finance.”

The Institute of Directors (IoD) echoed these sentiments. Graeme Leach, Chief Economist at the IoD, said: “Entrenched problems require innovative solutions and the Funding for Lending Scheme is an imaginative attempt to boost bank lending.

“The Funding for Lending Scheme provides real incentives for the banks to lend more using the ‘collateral swap’ with the Bank of England. The Bank of England will lend Treasury Bills to the banks, in the hope that they will use them to provide more and cheaper loans to companies and consumers. And the more the banks lend, the cheaper it will be for them to fund that lending.“

However, Mr Leach had this warning: “But there’s one snag: improving the supply of loans matters little if companies and consumers don’t have the confidence to borrow. The Governor and the Chancellor should be complemented for their innovation, but only time will tell if it is a success”.

Brian Murphy, Head of Lending at The Mortgage Advice Bureau, said: “Despite having pumped £375bn into financial institutions through Quantitative Easing this has not translated into increased lending to UK households and businesses.

“By making cheap funding available specifically to lend to individuals and business, and by penalising those who fail to lend in the future it should help to free up more credit.”

But he had this word of warning: “But while this scheme could mean up to £80bn is available to banks and building societies, we also need to see more flexibility being applied. We need to see more good quality borrowers getting access to mortgage funding if the scheme is to have the positive impact the Government is hoping for.”

This was posted in Bdaily's Members' News section by Jonathan Jones .