Funding for Lending Scheme branded failure with £810m slump

Scheme's future in doubt as 2014 sees almost £2bn decline in lending to small businesses

The government’s Funding for Lending Scheme (FLS), to encourage banks to loan to small businesses, has been branded a failure as new statistics reveal that net lending continued to fall in every quarter last year.

The latest statistics raise questions about the scheme’s viability as lending to small and medium firms fell by £810m in the final quarter of 2014, taking the total decline last year to nearly £2bn and a further £14bn decrease in lending to large corporates.

The FLS was launched in 2012 by the Bank of England and HM Treasury to encourage lending by providing commercial banks with cheap loans. Although initially created to boost mortgage and business loans, the scheme had a change of direction toward lending to small companies in 2014.

Chancellor of the exchequer George Osborne announced the scheme would be extended until the end of 2015 in last year’s Autumn Statement, but the bank’s data shows that participating lenders carried on contracting their overall corporate lending books, despite drawing down £15.6bn in cheap loans last year.

The three main lenders cited as being largely responsible for the fall were Clydesdale, who contracted net lending by  £476m, Nationwide building society (£333m) and Royal Bank of Scotland (£576m). Conversely, Aldemore, Arbuthnot Latham and Close Brothers increased net lending to small businesses by £129m, £103m and £110m respectively.

Labour’s shadow financial secretary Cathy Jamieson commented: “Labour’s better plan will establish a proper British investment bank and ensure we have more competition in our banking sector so that small and medium-sized get the funding they need to expand and create more good jobs.”

While John Allan of the Federation of Small Businesses explained: “Evidence shows that rather than turn to their banks, they are increasingly using their own resources to meet their financing needs, and paying down their debts rather than increasing them.”

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