David Smith, highly respected Economics Editor of the Sunday Times, wrote recently about the crisis in bank lending. Business lending is falling by about 4% per year and the problem is worst for the Small to Medium Enterprise (SME) sector. Mr. Smith reports that the Banks and the Treasury agree that the problem is lack of demand rather than the banks refusing credit.
The issue of access to credit among SMEs is a chicken and egg conundrum. Is it a lack of demand or a lack of supply? The Business, Innovations & Skills select committee in Parliament, of which I am a member, has debated this issue with business leaders, bankers and the Secretary of State himself. Are we any the wiser?
It is not all bad news. Both Lloyds and Santander have met their lending targets under the Merlin Agreement. According to the independent SME Finance Monitor figures out last week 71% of loan applications were agreed without question and 85% of overdraft applications were also agreed.
But David Smith makes the point, that some of my colleagues do, that many SMEs are put off from applying because word of mouth makes them think the answer will be no and worse drawing attention to their business will result in their bank tightening the screws on whatever facilities they do have agreed. Good data on loan applications can mask a greater number of businesses who could expand not even approaching the banks in the first place.
I must say that unlike many of my colleagues I have not had a single letter or e mail from anyone with a small business that has had an application for credit rejected. I did a survey of businesses in Stourbridge two years ago, in the middle of the banking crisis. I was expecting 'access to credit' to top the list of concerns. But it was outflanked by rising energy costs and business rates to a distant third position on the concern list. I suspect if I repeated the survey again rising energy costs would remain the top concern by an even wider margin.
A joint British Banking Association and Industry sector survey of five thousand businesses found two thirds of respondents wanting to de-leverage rather than take on more debt, 49% felt the biggest obstacle was uncertainty about the economy rather than access to finance. But, underlining one of David Smith's arguments yesterday, 40% of respondents thought that any application for finance would be declined.
Vince Cable is convinced that greater competition between banks is a large part of the answer. When you have a situation where five banks have 90% of the SME lending market then there is a problem. If the system was liberated by the entrance of players like Virgin and Tesco, the large number of businesses that are put off from even applying for credit under the status quo, might summon up the confidence to go for it.