Companies who need to borrow money got a lift today as The Bank of England and HM Treasury launched a scheme which incentivises them to lend.
The Funding for Lending Scheme, launched by HM Treasury today, is designed to boost lending to households and businesses. It allows banks and building societies to borrow relatively cheaply from the Bank of England for up to four years.
Banks will provide assets, such as business or mortgage loans, to the Bank of England as security against that lending. Banks will be able to borrow during the 18 months from August 1, 2012 until January 31, 2014.
The scheme is meant to give banks a strong incentive to increase lending by lowering interest rates and increasing the availability of business loans and mortgages. The more that they lend, the more they will be able to borrow from the Bank of England.
Banks which increase their lending will pay lower fees on their borrowing while those that reduce their lending they will pay a higher fee. The Bank of England will publish data on the usage of the FLS along with lending data from the participants on a quarterly basis.
Ms Lee Hopley of manufacturer’ organisation EEF said: “The intention here is good but if companies have investments going unfunded because of financing challenges they must be clear about how this [scheme] works and how it complements what’s available already if they are to return to the banks.”
CBI director-general John Cridland said, “Smaller businesses I talk to are concerned with cost of borrowing as well as with its availability. Funding for Lending will help the transition to a ‘new normal’, where structural changes in banking, driven by capital and liquidity reforms, are impacting on business finance.”
The rationale for the Funding for Lending scheme is laudable, says EEF, in taking a new approach – incentivising banks to lend by bringing the cost of their own funding down. “This scheme provides a couple of ways to incentivise the banks to increase their net lending my making it cheaper the more they lend,” said Ms Hopley.
The scheme pledges to be transparent, by providing reporting of how the funding has been drawn down.
Hopley added that if economic conditions were ‘normal’, the Funding for Lending scheme would make a meaningful difference to lending to companies, especially smaller SMEs who struggle to get loans at the moment. But the economy and conditions imposed on the banking sector makes the efficacy of the scheme much harder to predict.
“Banks take a different approach to risk than they did in the past. There is this need for banks to rebuild their balance sheets, and new regulatory requirements that puts pressure on lending decisions. Pricing has gone up and you have new covenants, terms, conditions and fees being applied to loans.”
The demand for business loans has been constrained by lack of confidence about bank lending, and a lack of clear information about the different schemes that have been introduced to stimulate funding.
EEF says the government must try harder to articulate the merits of various schemes to promote lending, to explain to businesses how these should help in making access to finance easier. “Banks are really too big and have different priorities, to take this task on themselves. But it is needed,” Hopley said.
A spokesman for Royal Bank of Scotland said: “We welcome the scheme and the opportunity to provide cheaper finance for our customers. RBS already lends more to UK businesses than any other bank and we hope this scheme helps us build on that.”