Credit light at end of tunnel

Posted on 30 Nov 2009 by The Manufacturer

Efforts from the Bank of England and the Government to unblock bank lending is finally paying off for manufacturers, according to a survey by EEF.

• Manufacturers tell EEF credit is easier to access
• 32% of firms reported rise in the cost of finance in past two months, compared with 47% and 44% in previous quarters
• 47% of companies saw the cost of new borrowing rise in the past two months, down from 56%

Manufacturers have reported an easing in credit conditions for the first time in over a year, says EEF, the manufacturers’ organisation. But it says it is clearly too soon to say conditions are back to normal and policymakers cannot afford to assume the issue closed.

“Firms have been struggling with credit constraints for the best part of two years but efforts to restore some normality to financial markets were always going to take time,” said Lee Hopley, EEF’s head of economic policy.

“It now appears there is light at the end of the tunnel and conditions are now starting to improve. If this continues it will help allay fears that credit constraints would derail companies’ ability to take advantage of the recovery.

The Bank of England will have to move carefully, she warned, adding that as signs of an upturn increase, companies, and especially small and medium-sized firms, will remain vulnerable to higher costs or reductions in credit availability.

Tom Lawton, head of manufacturing at accountants and business advisers BDO LLP, said: “It is pleasing to see that manufacturers are seeing some less negative changes in the availability and cost of credit and this might help provide some much needed confidence in the sector. But we believe that EEF is correct that it is too early to say that conditions are back to normal. In our view there remains real potential for continuing difficulties in UK and global financial markets which will continue to make credit hard to get and relatively expensive.” (more analysis below).

EEF has tracked credit conditions for manufacturers on a quarterly basis since the end of 2007. For the first time, relatively fewer companies reported an increase in the cost of credit over the past two months. Equally importantly, considerably fewer companies have seen a reduction in the availability of new and existing credit facilities which implies lines of credit and finance are freeing up.

Key findings include:
• 32% of firms reported an increase in the overall cost of finance from banks and other finance providers in the past two months. This compares with 47% in Q3 and 44% in Q2. This is the lowest figure since this survey was first conducted at the end of 2007.
• 47% of companies saw the cost of new borrowing rise in the past two months, down from 56% in the previous quarter.
• The proportion of companies reporting higher fees on existing lines of credit fell to 28% from 43% in Q3.

BDO’s Lawton said that in addition to several big indicators of credit market difficulties, including the credit holiday for developer Dubai World last week and the Bank of England’s plus £60bn in secret loans to the Royal Bank of Scotland and HBOS last year, banks are simply in poor shape.

“In addition to several “one off” financial institution problems, the UK banks are having to rebuild their balance sheets, revisit their capital reserve balances and generally manage in a very difficult period for inter-bank lending and costs. Credit will remain at the top of the agenda for manufacturers for now.”