A think tank has called for the government's plans for an infrastructure bank and a business bank to be merged into one body.
UK think tank the Institute for Public Policy Research said in a report released on September 19 that the business bank initiative would need to be ambitious to be successful, and should offer investments into infrastructure to help the UK catch up with the rest of the developed world.
In what the IPPR is calling the British Investment Bank, the bank should be 100% state owned, should increase lending for infrastructure and to SMEs and should be allowed to immediately raise funds on capital markets by issuing bonds
The IPPR's report also said the government would need to inject £40bn into the bank to kick-start it, with the leveraging meaning it could have a balance sheet of over £140bn within four years.
This highly ambitious figure is way off current expenditure by government on business-boosting initiatives.
The government has already signed off on introducing a Green Investment Bank (GIB) in 2012 (subject to EU
approval) as part of its commitment to delivering long-term sustainable growth consistent with the UK’s climate change objectives.
This GIB will only have initial funding of £3bn from the government, but even when it is able to raise funds in capital markets the GIB will fall short of being a suitable national investment bank, said the IPPR's report.
Tony Dolphin, chief economist for the IPPR, added that the capital injection needed to launch the investment bank should be disregarded from the government's balance sheet to help the chancellor meet his fiscal targets.
"A fully-fledged British Investment Bank should not be held back by the vagaries of the UK’s accounting practices. Its self-financing activities should be excluded from the government’s target fiscal measures and it should be free to raise funds on capital markets.”
The report also finds that SMEs have been struggling to obtain credit from the banks for more than five years - a time which pre-dates the current recession.
"In the decades prior to the financial crisis, commercial banks gradually pared back their basic credit provision function in order to focus on short-term trading and commission-based activities such as mergers and acquisitions: activities that yielded bigger and more immediate profits," the report said.
"The introduction of a new risk weighting system for bank assets under (European regulation) Basel III is likely to see commercial banks further reduce their exposure to the SME sector, since it will be subject to higher-risk premiums."
Companies looking to raise between £500,000 and £2m were the worst hit, said the IPPR, because the amount was too great to raise informally from friends and family but too little to interest investors.
Despite the two sectors - infrastructure and SME lending - needing different skill sets from bankers, the IPPR drew inspiration from Brazil where the Brazilian Development Bank has the same dual mandate. It would also diversify the business and provide regular low-risk returns from some of the simpler infrastructure projects.
However, the British Bankers' Association dismissed the notion that the majority of firms were not gaining access to credit, saying that while many firms renewed credit easily, only one in ten businesses wanted to borrow at any time.
"Most do not need, or want, external funding and for many others the current economic climate is too uncertain for them to want to take on debt. In many cases, as interest rates are historically low, those with credit are paying off their loans and overdrafts rather than taking out more credit," a spokesman said.
"Businesses which want to borrow should not be put off approaching their bank. If their application does not succeed at first, the banks offer an independently-monitored appeals process. If the business needs further help, the banks offer access to a UK-wide network of business mentors. And if bank financing is not appropriate, the bank will signpost alternative sources of support and funding which may have a greater appetite for risk."
The UK’s six largest banks (Barclays, HSBC, Lloyds, RBS, Santander and Standard Chartered) has already established the Business Finance Taskforce to analyse the facts, create momentum and ensure money is lent prudently and fairly to support the economic recovery without initiating another credit surge.
The main initiatives are the Better Business Finance website, which contains fact sheets and a dedicated section for start ups, the Mentors For Me online mentoring network and Business Finance For You, which lists a wide range of alternative lenders including business angels, regional funds, government schemes and other banks.