by Angela Knight
Since the onset of the global financial crisis, the debate on bank finance for businesses has been confused. We are told the banks are not lending enough; or they are lending enough but the terms are too onerous; or they are turning down loan requests from viable businesses.
On the other hand, over this same period, the banks have seen a steady decline in demand for loans - businesses are, quite reasonably, paying down their overheads, including loans and overdrafts – while there has been a steep increase in the cost of wholesale funding, upon which much bank lending depends. Securitisation markets remain subdued, with knock-on consequences for the flow of bank credit into the wider economy.
Past downturns show us that a pick-up in lending demand usually lags behind the pace of economic recovery. The normal pattern would be for the pick-up to start with larger businesses and then work through to the smaller ones. This time however the smaller businesses may be in a better position than their larger counterparts. Some larger businesses are yet to deal with their exposures to commercial real estate, but many smaller firms find themselves in a comparatively strong financial position, having paid down some of their borrowings.
The banks carry special responsibilities here, both in the wake of the economic crisis and as engines of the economy. We have all been through very turbulent times and banks must take their share of the responsibility for what happened. And although other factors played a significant part – from fiscal policy to the problems in international markets – it is certainly true that all business sectors – including our own - are still coming to terms with new levels of demand and production.
This has had a clear effect on people’s confidence to invest. It is only natural that, at times of economic uncertainty, many people look to pay back existing commitments rather than to take on anything new. But banks do need to be there to make it easier for clients to do the things they want to do. And, when it comes to lending, although many businesses require no borrowing at all, they need to work harder to ensure customers have confidence that going to the bank with a sound business proposal will be met with a yes instead of being put off without even applying.
Banks are currently approving four out of every five business loan applications, and are registering some 40,000 new business banking relationships every month - predominantly start-ups. The application process is likely to be more rigorous than it was in the easy credit era which ended with the credit crunch, but the banks’ lending criteria have not changed. They have money available to lend to viable businesses – and it is their business to do so.
This is where criticism of the banking sector can have a completely counter-intuitive effect. When the sector’s critics claim the banks are not lending, the message many business people hear is that it isn’t worth trying. Nobody benefits from that situation, customers simply stay away.
Beyond the bank-bashing rhetoric, and back in the realm of real commerce, many firms are of course considering if borrowing is the best way to grow their business right now. The banks’ responsibility is to help their clients to understand the risks, and manage them appropriately. For some that may be building up a solid equity base to provide the foundations for future funding, giving banks the basis to provide additional working capital. For others it may be helping with business start up costs or raising finance to expand overseas. If banks do these things well, society benefits because successful banks create jobs and pay tax.
So for all of these reasons, the chief executives of the six largest UK banks decided last July to take a close look at how they could do more to help the UK return to sustainable growth. The Business Finance Taskforce was set up to analyse the facts, to create momentum: to ensure money is lent prudently to viable small to medium companies; and to support the economic recovery without initiating another credit surge.
The Taskforce was announced in the Government’s green paper Financing a Private Sector Recovery. It recognised that small and growing businesses constitute a vital contributor to economic recovery, as it is through them that many new jobs will be created. Observers from HM Treasury, the Department for Business, Innovation and Skills and the Bank of England were present throughout the project.
Most of the actions to which the Taskforce is committed will start rolling out next month. They fall into three broad areas.
The first is to improve customer relationships. To this end we will support a network of business mentors, working with business groups to deliver this free service to help on finance for small businesses across the UK.
Second, we will improve the service levels to micro enterprises (now defined by the UK as businesses with fewer than 10 employers and a turnover or balance sheet of under €2m). We will do this by setting out a lending code - the level of service the banks will provide - and outline additional sources of help, advice and finance. For the larger businesses – that is up to £25m turnover – we will set out the minimum standards they can expect when approaching a bank for loans and for other services.
And third, there will be a transparent internal appeals process for when applications are declined.
Another action already started is the pre-refinancing dialogue: 12 months ahead of the end of a loan, banks will contact customers to begin to plan the next steps.
And because there is an ‘equity gap’ for some businesses, we are establishing and investing in a new £1.5bn business growth fund.
In order to provide better information on the market we have agreed to fund a regular independent survey. The pilot starts this month. It is steered by a group composed of business representative bodies and has an independent chairman. Meanwhile, the industry is also improving its own data to give broader statistics on lending, such as the amount borrowed in deprived areas, and on national business start ups.
Regional events will run throughout 2011 which hoist the flag that the banking industry is open for business and we will help those businesses we have had to turn down.
Actions will always speak louder than words, and it is our hope that the actions undertaken by the banks this year to help small business will begin to repair the vital relationship between businesses and the banks which support their work. Together they represent the only sure way to bring lasting growth to the UK economy.
Angela Knight, Chief Executive, British Bankers’ Association