North-East Business
Banks accused of short-changing small firms
8:00am Tuesday 14th February 2012
BANKS fell short of their government targets to lend to small businesses last year, prompting fresh warnings from business leaders that the cost of loans was discouraging borrowing.
Figures from the Bank of England under the Project Merlin deal showed that total net lending from the five main UK banks' fell in every quarter of 2011, The figures, which include loan repayments, showed a 3 per cent drop in net lending in the final quarter of last year.
Separately, a survey reported a drop in small firms using a bank overdraft or loan in the past two years.
The survey of 11,000 firms by the Federation of Small Businesses (FSB) indicated that only one in 10 firms obtained a bank loan in 2011.
Just over one in three used their overdraft facility, it suggested.
The government said the figures reflected the poor economy.
However Labour said the plan, brokered by the coalition, hadn't worked.
"After a year it's now clear that George Osborne's backroom deal with the banks has been a total failure. It's been a good deal for the banks, but a bad deal for small businesses and taxpayers," said shadow treasury minister, Chris Leslie.
Under the Project Merlin agreement with the government, the banks said they would make increased lending of £190bn available to businesses in 2011, including £76bn for small companies. The outcome was that they lent £214.9bn overall and £74.9bn to small businesses.
The collapse of many smaller businesses during the financial crisis was blamed on banks' refusal to lend to viable companies.
The banks blamed the shortfall on fewer firms coming forward for credit.
A spokesman for the banks said demand for credit from small firms fell last year and "remains weak".
Some companies said that even when loans are made available they are often not on competitive terms.
Mr Osborne has decided not to repeat the Merlin deal and is pressing ahead with talks on a "credit easing" scheme to lower the cost of borrowing to businesses.