New Funding for Lending Scheme launched

A new scheme designed to deliver cheap credit to banks in order to boost the economy has been officially launched by the Government and the Bank of England.

Under the Funding for Lending Scheme (FLS), banks and building societies will be able to borrow finance at cheaper rates than other financial institutions, in turn helping households and businesses access more credit.

Up to £80 billion will be available to institutions over the next 18 months.

Banks will be given the incentive that if they lend more, they will be able to borrow more from the FLS and at further lower cost than those that scale back lending.

Institutions will be able to borrow up to five per cent of its existing stock for lending and only be charged 0.75 per cent interest - significantly lower than the average rate. Those which scale back lending will see interest rates increase up to 1.5 per cent.

In addition, every pound of additional lending to businesses and households will allow the institution to borrow an additional pound from the scheme.

The Governor of the Bank of England, Mervyn King, and Chancellor George Osborne first announced details of the scheme last month. According to mortgage experts for the BBC, the scheme has already prompted some mortgage lenders to offer cheaper rates on long-term loans.

Banks offering loans through another Government initiative designed to encourage small business lending - the National Loan Guarantee Scheme (NLGS) - are expected to phase out related products over the coming months. The Coalition launched the NLGS in March but figures suggest it has failed to increase lending to businesses.

The Treasury said that while the NLGS had been 'successful in providing reduced rate loans for smaller businesses', changes in market conditions since its introduction meant it was now 'less economical' for banks to raise unsecured funding.

Chancellor George Osborne said: "The NLGS has made a real difference, with over 16,000 cheaper loans worth over £2.5bn already offered to businesses across the UK. In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work."

Speaking to the BBC, national chairman of the Federation of Small Businesses (FSB), John Walker, said: "Communication will be key - whatever the name of the scheme - to ensure that businesses actually benefit."

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