British banks’ lending to businesses has continued its two year decline. Credit costs are expected to rise in the coming months, the Bank of England warned.
Lending to business fell by £4bn per year, at an annualised rate of 3.7%, in the last quarter. Small and medium-sized enterprises (SMEs) with a turnover of less than £1m were affected more severely, with their stock of lending dropping by 7%. The Bank of England publication "Trends in Lending July 2011" concluded that "larger companies have wider access to funding than smaller companies."
Both demand and supply side for business credit have been subdued for the past three months. Some major UK lenders argued that small firms continued to repay bank debt and search for alternative funding. However, the 2011 June Credit Conditions Survey probed otherwise, saying that corporate are willing to borrow but are just scared away by the rising costs and limited availability of credit.
John Walker, national chairman of the Federation of Small Businesses (FSB) said, "Once again the smallest of businesses are losing out. It is very bad news that the volume of lending to small firms fell – despite evidence that there was a marked increase in demand for finance from the smallest of businesses." To solve the problem, the government has threatened banks with further regulation or taxation if they fail to lend more.
With minimal funding to the backbone of the UK’s economy, more than a third of UK’s businesses were forced to abandon their growth plans, according to a FSB survey. In fact, UK GDP figures for the first quarter of 2011 showed that business investment has contracted, hence it was no surprise that Vince Cable was worried about Britain’s economic recovery. John Walker emphasised, "it is the UK’s 4.8 million small firms that will help pull the recovery onto firmer ground, yet they are being given a worse deal than larger businesses."
"Until there is more competition in the banking sector, this practice will continue and that no amount of lending targets will improve the situation," he continued. Luckily, competition is just around the corner.
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