Banks get warning on small business lending

The UK’s major banks could be faced with a competition enquiry if they do not step up the level of lending to SMEs and reduce its cost.

The warning came from the Chancellor, Alistair Darling during a meeting this week with bank leaders.

Mr Darling expressed concerns that the banks were using historically low interest rates to shore up their own finances and were not offering small firms affordable loans.

The Chancellor pointed to figures compiled by the Bank of England that revealed only 2 per cent of SMEs were paying more than 9 per cent over the base rate for credit in 2007. This year that number has climbed to a third.

The banks were informed that Lord Myners, the City Minister, would be inviting them over the coming weeks to present their lending books so that the government can determine how much is being charged for lending facilities to small businesses.

Were the Treasury to conclude that the profit margins on loans to SMEs are unfair and anti-competitive, the banks could be threatened with a formal enquiry from the Office of Fair Trading.

Mr Darling said: “It is very important that each and every bank knows that there is someone looking over their shoulder. I want to make sure that we have a competitive banking system in this country.”

Before the meeting, Lord Mandelson, the Business Secretary, had highlighted government worries: “The Chancellor and I are not satisfied that lending is as it should be, even now after this time that we have been operating our policies. We are also concerned about the cost of lending.”

Commenting on the meeting, David Frost, director general of the British Chambers of Commerce, said: “It will be business that drives the UK out of recession, but that can only happen if the banks are prepared to play their part. I am still hearing too many stories of small businesses being unable to access appropriate financing.

“The situation is complicated but the government certainly needs to keep the pressure up. Banks need to be transparent and open about their approach to lending to small firms.”

The Forum of Private Business (FPB) welcomed the Chancellor’s intervention but argued that many of the problems encountered by small firms in accessing finance are down to applications being decided by centrally-prescribed criteria rather than being considered on a case-by-case basis by local bank managers.

The FPB said it wanted to see a more devolved decision-making process adopted by the banks and bank managers given greater scope for using their own judgement and discretion when approving loans.

This, the business group contended, would help improve the flow of credit to small businesses and would prevent firms from being unfairly classed as high-risk.

Chris Gorman, a FPB spokesman, said: “One of the clear problems our members are reporting in relation to the banks is this perception that they are deciding applications according to an unfair ‘tick-box’ mentality.

“Many feel that their businesses are perfectly viable but are being denied loans or overdrafts because a computer somewhere says ‘no’. We want to see a return of the old-fashioned relationships between small businesses and their local bank managers.”