Recent statistics revealed in the Bank of England’s figures, have shown that lending by banks fell by £10.7bn in 2011, otherwise put; banks received £10.7bn more in loan repayments than they gave out in new loans. This takes the total figure of fall in loan administration to just under £83bn since the financial crisis in 2008. Many have urged the Government and George Osborne to get tougher on the banks, especially Lloyds and RBS, which are part-owned by us the taxpayer, to force them to start lending again. Even Sir Mervin King has said “For a long period I have pointed out that the Governments own two of the biggest four lenders. If they own them, they can do something about it” The ‘potential’ lying in these banks and corporations suggested by the Director General of the CBI are all but currently lying stagnant. Government demands for more liquidity against loans administered by banks are not having the desired effect of financial stability, in that banks seek liquidity from external sources to shore up loans, but have consequently resulted in the reduction on the level of loans administered in order to achieve the liquidity ratios required.
There is currently high doubt in the banking world, and high street banks are lacking in confidence to ratify loans to not only people, but small and medium sized businesses. The only loans currently being full administered are those in which a high level of company or personal assets can be attained as securities upon the loan. For new start up businesses and first time buyers, this is a huge issue. It is a vicious circle in which a lack of business confidence in the current economic climate leads to uncertainty about the ability of loan repayments, which halts growth and expansion of new companies and thus the UK economy as a whole, which in turn has its own detrimental effect on improving the UK’s economic state.
Cash strapped firms cannot rely on banks to provide them with the money that they urgently need to grow. John Cridland, Director General of the CBI, announced amid fears of a “steal a march on the UK by other Countries, if we don’t act quickly” that businesses need alternatives to banks to raise money- “for too long small and medium sized businesses have relied too heavily on the high street banks for credit”. Suggesting himself that smaller businesses should perhaps start issuing bond to private investors to raise funds, stating that “new businesses should be given easier access to independent financial advisors” to guide them through the current financial maze in which inexperienced businesses are struggling to present themselves as viable lending propositions.
Despite statements by an independent institution that less than 50% of businesses that approach a bank for money “can’t get what they want”. Since the crisis began in 2008 banks insist that they except 80% of all loan applicant and RBS stating figures at the 85% mark. But a report commissioned by independent researchers BDRC has raised serious doubt about these claims. Although the report revealed that 85% of overdrafts and 66% of loans were accepted, new businesses, the type that create more jobs, were the most likely to face rejection and 16% of all applications faced complications such as too little money offered.
To tackle this problem head on, Project Merlin was created on the 9th of Feb 2011 by the coalition government, spear headed by David Cameron. Merlin was an agreement created between the government and 4 of the major high street banks (Barclays, HSBC, RBS and Lloyds TSB) covering various aspects of banking activity; lending, bonuses, promoting transparency etc… One aspect highlighted within the agreement was a target of £190bn to be lent to businesses between the 4 banks in 2011, with £76bn of that to be targeted to small and medium sized firms. This itself was in addition to the government increasing the tax levy on banks to £2.5bn which in 2011 raised £800m. Other pledges included a promise to provide £200m to Cameron’s Big Society Bank created to focus on the financing of community projects.
Although it was announced that banks had met their £190bn Project Merlin targets last year, in fact only £74.9bn was lent out to small and medium sized businesses, a shortfall of £1.1bn. The banks blamed the poor economic backdrop and fewer firms coming forward for the credit, which they claim was made available. “The Merlin targets have failed” Andrew Cave from the Federation of Small Businesses told the BBC. A survey of 11,000 firms by the Federation of Small Businesses (FSB) indicated that only one in 10 firms obtained a bank loan in 2011. “Talking to our members, 30% of them say they missed a growth opportunity because they weren’t able to access finance at the right times, so there is still a problem.” The government said the figures reflected the poor economy and that “It’s going to take some time before the banking sector is back to normal,”.