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Lending report by Bank of England is described as a 'horror story' by Lib Dem politician
Lending to small businesses fell again in the first quarter of the year despite pledges by the banks to bolster the supply of credit to this potential powerhouse of the economy.
The Bank of England's trends in lending report – dubbed a "horror story" by one politician – also showed banks are imposing onerous conditions and trying to move customers from conventional overdraft facilities to more expensive loans.
The latest fall in business lending – a potential worry for the government – came amid better news for the chancellor after official figures showed government borrowing was almost £5bn lower than expected in the year to March.
Public sector net borrowing, excluding the cost of the bank bailouts, hit £141.1bn in the 2010/11 financial year. That was £4.8bn lower than George Osborne was expecting in last month's budget.
But while his deficit-cutting plans may be on track, his hopes of fuelling the economy could be dashed by the Bank of England data showing that the smallest businesses were facing higher costs of borrowing even as terms for larger businesses and individuals were easing.
The annual rate of growth in lending to small and medium enterprises (SMEs) has been negative since late 2009 and fell to minus 2% in February 2011. Data from the five major banks – Santander, Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group – showed lending fell £2bn in the first quarter of 2011.
The banks signed the Project Merlin deal in February in which they pledged to lend £190bn to businesses this year. Lord Oakeshott, the Liberal Democrat peer who resigned as a party spokesman to protest over the weak terms of Merlin, said: "The bank lending horror story is getting even worse for small business – and the smaller you are, the worse it gets . The government should never have given the banks their fig leaf for failure to lend in Project Merlin – it is now putting the private sector recovery and jobs in grave danger."
The spokesman for the Federation of Small Businesses said: "It's ironic that the part of the economy that is pivotal to jobs and recovery is the one that banks don't want to deal with."
The trends in lending report – which showed mortgage lending rose in January and February – said demand for credit from small business had fallen sharply. "Some smaller businesses have reported that requirements to offer personal guarantees have discouraged them from proceeding further with credit applications and that credit application procedures have been onerous," the Bank of England said. "Some have also reported that banks have been seeking to replace overdraft facilities with alternative, more expensive, credit products."
The British Bankers' Association said the industry had launched measures to help small businesses while the Treasury said the lending targets will be used to assess bonuses for bank chief executives. "The government will closely monitor progress against these commitments," a Treasury spokesman said.
While the Treasury welcomed the better than expected borrowing data, Rowena Crawford, of the Institute for Fiscal Studies, pointed out that, at 9.6% of GDP, the deficit is still the second-highest since the second world war. The previous record was the 11.1% of the previous year. She added: "Furthermore, lower borrowing in 2010–11 will not necessarily feed through into lower borrowing in future years."
A Treasury spokesman cited the threatened downgrade of US debt by ratings agency Standard & Poor's as evidence that Britain must press on with its austerity measures. "As this week's action by Standard & Poor's has shown, concerns over deficits persist for even the largest economies and we need to stick to our plan to pay off the nation's credit card over the rest of this Parliament," he said.