Banks increase lending to companies in Q3 but fail to meet SME targets

In February 2011, the Government made an agreement known as ‘Project Merlin’ with four of the UK’s major high street banks, Barclays, Lloyds Banking Group, the Royal Bank of Scotland and HSBC, with the intention of promoting lending to businesses. Under the agreement, the banks pledged to lend £190 billion to businesses in 2011, an increase of 15% on 2010, and of that, £76 billion would go to small and medium enterprises with a turnover of less than £25 million.

This year’s Q3 figures show that the banks are on track to meet their targets for the main lending commitment, with £57.4 billion given out in the third quarter, taking the total lending for the year to £157.7 billion – 11% ahead of the nine-month target of £142.5bn.

However, the breakdown tells a different story for SMEs, with only £18.8 billion lent out in Q3, compared with £20.5 billion in second quarter and £16.8 billion in the first quarter. This takes the total small business lending for this year to £56.1bn, which falls short of the nine-month target of £57bn.

There is controversy over the reasons for this reduced lending to SMEs – the Banks argue there is weak demand from businesses for loans, whereas business groups express concern over the lack of competition in banking, the five main banks controlling 85% of the small business banking market, and the impact this has on the cost of credit. 

John Walker, National Chairman of the Federation of Small Businesses, emphasised the need for change, commenting that there needs to be “more competition and new lines of credit opening for small firms if they are to help boost the recovery.” While Tim Kirk, partner and head of financial services at BDO, said the problem lies in the short term, with the banks attempting a balancing act between ensuring their own financial stability and attempting to support economic growth in the wider community. The overall message being that banks will be able to take the additional risks needed to support the small business sector once they have strengthened their own capital positions.

What is your opinion on the issue? Have you experienced similar issues in obtaining bank loans as a small business? would welcome your comments on the topic.

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