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Bank Closures: Branch Sharing Could Provide a Solution

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Targets or no targets, the government's Project Merlin scheme designed to get the banks to significantly boost lending to small businesses has fallen short of achieving its aims.

In excess of £1 billion short, in fact. Further, new lending is what matters most and the statistics look even worse when factors such as invoice finance or the many instances where overdrafts have been turned into loans are taken away. The official figures certainly don't show average interest rates that are significantly above the Bank of England base rate or the many demands for personal guarantees.

The Chancellor's next plan is to implement 'credit easing' via a National Loan Guarantee scheme in order to reduce these steep lending costs, but by focusing almost exclusively on lending figures another serious issue relating to bank-business relationships has gone largely unnoticed - the alarming decline in local branches that has taken place over the last two decades.

According to figures from the Campaign for Community Banking Services (CCBS) more than 7,500 local banks have closed their doors since 1990 - 44% of all UK branches.

Our small business members are reporting that, in parallel to these closures, the working relationships they once enjoyed with local bank managers, individuals who knew their businesses and could assess lending risk accurately, realistically and on a case-by-case basis, are also disappearing.

Now, small business owners complain about the over-centralisation of their banks, say that their 'relationship' managers are often anything but and argue that lending decisions are made by people on high who are more interested in ticking boxes than in getting to know the merits of their businesses.

Many entrepreneurs feel that the only reason their bank appears to want to engage with them at all is in order to sell to them. The accusation is that, with branch closures has come a steadily eroding level of service. In light of this, it is no surprise that official figures show demand for borrowing is down. Business owners are suffering a crisis of confidence in their banks and, if these firms are to be able to access the funding they need to grow their businesses and create the jobs that will drive economic growth in the future, clearly something must be done to change this situation.

The question is, what? While it is important to recognise that we are in a new era of tighter finance and that it is businesses which embrace the principle of better financial management - which means producing and presenting regular, standardised accounts and financial projections when approaching lenders - that will get the funding they need, banks have to up their game as well.

One thing they should do is expand their risk criteria to things like strong order books. On numerous occasions recently I have heard about successful, solvent firms seeking to borrow - often for the first time - in order to invest in new products or projects, with orders based on these development plans stacked up - only to be thwarted by banks' resolutely unreasonable and unworkable terms.

In order to mend these broken relationships, build confidence among business owners and win back customers who are beginning to explore emerging, innovative funding models less reliant on such automated risk management systems, banks need to restore the levels of service businesses once valued - and a strong, local presence is key to this.

The Forum is lobbying for better bank infrastructures as part of our Get Britain Trading campaign, as well as calling for greater decentralisation and more local autonomy for branch managers to make lending decisions based on a wider range of risk criteria.

But, as yet, the opposite is happening. According to the CCBS just 414 rural and 466 urban communities in the UK have one bank left.

Perhaps British banks could follow their US counterparts and explore the idea of branch sharing. They might baulk at the idea in the interests of competiveness - achieving which is of course a good thing - but it is difficult to see how poorer service and less local accountability can ever equate to better competition.

Around the Web

Project Merlin - Wikipedia, the free encyclopedia

Banks miss Project Merlin lending targets to small business ...

BBC News - Q&A: Project Merlin bank deal

Bank lending falls despite 'Project Merlin' agreement - Business ...

Bank branch closures soar over five years | Metro.co.uk

Bank branch network faces hundreds of closures | Business | The ...