THERE'S AVAILABLE CREDIT…. YET SME LENDING IS STILL FALLING
There may be a surge in business confidence, but of a resurgence in bank lending to business there is still no sign. Latest hard lending figures from the Bank of England continue to disappoint, with an appreciable drop in bank lending to businesses.
Net lending to non-financial companies fell by a further £2.4 billion in April, following declines of £2.5 billion in March, £633 million in February, £1.1 billion in January, £1.7 billion in December and £4.4 billion in November – the sharpest drop since the series started in April 2011.
Within this total, net lending to small and medium-sized enterprises (SMEs) fell by £629 million in April. Lending to SME’s had previously fallen by £1.1 billion in March (which was the largest drop since December 2012).
The Bank of England’s regional agents’ May report offered some clues as to why bank lending to businesses remains weak.
Although the agents reported that demand for credit had increased they also noted that, “it remained sluggish especially among small and medium-sized enterprises, as trust in banking relationships remained weak”.
The regional agents also commented that “some firms were likely to prefer to finance investment with their accumulated cash balances rather than with increased borrowing: in that context, many large companies had taken advantage of the opportunity to raise funds in the debt capital markets on favourable terms over the past year. In addition, Agents’ contacts reported that, although spare capacity in companies was limited, productivity growth, combined with steady – but not exceptional – increases in capital and labour should be sufficient to meet expected demand.”
The Bank’s credit conditions survey indicates that the overall availability of credit to the corporate sector was essentially unchanged in the second quarter after rising over the previous six quarters. The approval rate for loan applications for small and medium-sized companies was reported to have increased slightly in the second quarter.
Credit availability for corporates is seen picking up in the third quarter.
Slightly worrying though, says Howard Archer, economist at Global Insight, is that “the approval rate for loans from small businesses is expected to fall in the third quarter, while it is expected to improve slightly for medium-sized companies and be unchanged for large companies.”
Meanwhile, demand for corporate credit was reported to have picked up “significantly” across all company sizes in the second quarter and it is expected to rise again in the third quarter.
As demand for credit does pick up, it is, says Archer, “vitally important for sustainable, balanced UK growth that all companies who are in decent shape and who do want to borrow – whether it be lift investment, explore new markets or generally support their operations – can do so, and at a non-punishing interest rate. This applies to all companies, whatever their size.
“The Bank of England is now focusing the Funding for Lending Scheme entirely on lending to businesses. It has to be hoped that this increasingly has a significant positive impulse amid a much improved business environment.”
And, says Matthew Fell, CBI Director for Competitive Markets, “Although banks are making real efforts to support many of our ambitious companies, more must be done to help smaller businesses.
“If we are to re-balance the UK’s finance landscape we must unlock more direct investment from pension funds and insurers, ensuring growing firms are aware of the alternative finance options out there.
“We also need a tax system that better supports our medium-sized businesses to create jobs and growth.”