So the Bank of England is giving the major UK banks loans at low rates for them to lend on to help business and households. The problem is that this hasn’t worked too well in the past. That’s not been all the banks fault either. The banks have been told by the Government to
a) lend more responsibly
b) reduce their risk levels
c) lend more to business and
d) build up large capital buffers just in case there is another problem to reduce the requirement for another bail out.
The trouble is that you can’t do all of these things at the same time in a difficult market.
This new initiative may in principle work, the challenge is the practice. The fact that the lending criteria are much tighter than before the financial crisis is a particular challenge for SMEs and “startups”.
Its low risk to lend to a long established name, but if other business is going to flourish banks have to take risks. Some currently don’t seem to understand that. That also links to a reduction in discretion at local level where before the local bank manager could lend more freely on their own risk assessment knowing the client.
In many banks this has changed so that most of the lending control is centralised and driven by data rather than relationships. As a result of these factors there is a shortage of capital to invest in businesses at a sensible rate or on sensible terms which is stopping businesses flourishing. Even some profitable business with established track records are having credit lines terminated leading to potential disaster.
The other negative effect is that not being able to get money from your bank has driven both small business and households into seeking support from other sources – the payday loans or credit cards are amongst them. Both are a disaster for individuals, business and the economy. The rates charged are often near enough highway robbery which makes things worse for the borrower.
However some banks themselves are profiteering via this as well. One international bank using a “front brand” has just put its credit card interest rate up to 49.5% pa. Strange that if a well known British employee owned department store can charge 16.9% pa and still make money why are most bank credit cards at least 7% higher, let alone 23% more? But the lack of realistic funding provision from banks has often driven small business owners to use this type of last resort.
Bearing in mind SMEs employ 60% of all workers in UK if we can’t get this right then the knock on effects will ripple out and impact everyone. These headline initiatives are all very well but unless there is practical follow through to make sure it happens then its a waste of time. Lets hope this time that the money does get to to where it is so badly needed.