Lending to SMEs falls in spite of big profits

The politically explosive mix of high profits and a squeeze on credit to small firms has rocked the banking industry on to the back foot once again, as pressure to boost lending mounts.

According to the Bank of England’s most recent Trends in Lending report, overall lending to businesses contracted by £2.3bn in May – more than double the £1.1bn slide seen in April.

Lending to private firms was down 4.4% year-on-year in June, the Bank’s figures say, in contrast with the pre-credit crunch era when it was growing at an annual rate of almost 20%.

The British Bankers’ Association (BBA) attributes the trend to falling demand, as companies retrench and reduce debts, But the Federation of Small Businesses (FSB) claims firms are afraid to approach banks.

The FSB’s Stephen Alambritis says: “Some small businesses are saying that they are better off not approaching the banks – sometimes they think they are better off not provoking them.

“Demand is down, but with the obstruction and red tape, the word gets out that you’re better off lying low.”

Despite the concerns of the FSB, UK companies have fared much better than in the previous recession 20 years ago, helped by rock-bottom interest rates.

According to the BoE, major UK banks and building societies said net lending remained weak in June, and they expect demand to remain subdued in the coming months given concerns over the outlook.

The BBA’s latest figures say more than 11,000 new loans were provided for a total value of £598m in June , averaging around £50,000 each.

This, however, is down on last year, and far below the pre-recession level of almost £1bn a month being lent to small businesses, as the banks are caught between the politically motivated but contradictory imperatives of boosting their lending while rebuilding capital strength.

The FSB argues that UK small business lending is dominated by the ‘big four’ banks, and wants new entrants, such as Santander and building society Nationwide, to boost competition in small business lending.

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