Banks in bother after falling short of SME lending targets

Our biggest banks lent £16.8bn to SMEs in the first quarter, below the Project Merlin target of £19bn. But they insist it's not their fault.

by James Taylor
Last Updated: 19 Aug 2013
As expected, Bank of England figures released this morning revealed that the banks have not lent as much money to small and medium sized businesses as they were supposed to do under the terms of the much-vaunted Project Merlin agreement – £16.8bn, rather than the proscribed £19m. They argue that they're doing their best, but the demand just isn't there; and given the general climate, that's not totally implausible. But there's still a widespread sense that they're not doing enough to help out creditworthy businesses - particularly given their role in getting us into this mess in the first place.

As Business Secretary Vince Cable more or less admitted on Friday, the banks are on track to meet their overall Merlin lending target of £190bn – having dished out a total of £47.3bn in Q1 – but are lagging well behind their target for SMEs. The Bank hasn’t split out the data, so it's hard to know exactly who the worst offenders are (other than RBS, which has already admitted to a 7% drop in small business lending). It’s not Santander, though: the Spanish bank proudly proclaimed today that it's already ahead of schedule in its bid to lend £4bn to SMEs this year.

So whose fault is it? Vince has been playing hardball about the Government’s plans to wield a big stick if banks don’t raise their game, insisting that they can’t just blame lack of demand. But the banks insist they’re doing as much as they can. In response to today’s figures, the British Bankers Association blamed 'muted demand [which] reflects the relatively slow growth in demand for goods and services in the economy as a whole at present'; it points to a recent CBI survey in which only 8% of SMEs said finance was a source of concern. It's also true that total lending is running at a higher rate than last year - and it may be that things pick up further during the rest of the year if the economy continues its (admittedly glacial) recovery.

And there was some support for this view today: after four consecutive quarters of decline, the latest ICAEW/Grant Thornton UK Business Confidence Monitor saw a rise of 4.1 to +13.7, suggesting firms are feeling a bit more confident about the future. If that translates into more demand for credit, the banks may yet fulfil their Merlin obligations. But until that day comes, they can expect a lot more righteous indignation.

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