Bank of England criticises government’s handling of lending impasse

Businesses fear existing borrowing could be compromised by seeking new credit

The government has been criticised by the Bank of England for failing to boost bank lending to small and medium-sized firms – prompting fresh fears that lending targets will be missed again.

According to the Bank of England’s latest Agent’s Report, lending to UK businesses fell by £4.9bn overall last month, with lending to manufacturing and construction firms showing the greatest decline. 

Meanwhile, lending to private non-financial firms fell by £1.8bn in May, compared to a fall of £700m in April.

The report also found that small and medium-sized companies are thinking twice about borrowing due to concern that, if they seek additional funding, the banks could increase the cost of the money they have already borrowed, or cut their agreed overdraft limit.

According to Howard Archer, chief UK and European economist at financial forecasting group IHS Global Insight, the fall in lending to non-financial companies is being influenced by low demand for credit, and by companies looking to limit debt.

In an earlier report by the Bank of England, it was revealed that the major banks – Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander – lent £16.8bn to small and medium-sized firms in the first quarter of 2011.

However, recent figures show that bank lending is falling short of agreed targets set under the Project Merlin agreement, which stipulated that the banks would provide £76bn of credit to small firms this year – around £19bn a quarter. 

On a positive note, the Agent’s Report did find that the growth rate of exports remains robust – largely due to rising world demand and the competitive level of the sterling.




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