Sound the trumpets, fly the flags, the Funding for Lending Scheme (FLS) has finally got some money moving into the economy. The Bank of England recorded a £1.6bn increase in net loans by lenders using the FLS – which offers cheap money to banks and building societies to encourage them to lend more. But evidence suggests the money is flowing in one direction – homebuyers; leaving small businesses still in need of credit.
The increase in loans was recorded during the three months to June. This followed two negative quarters during which more was paid back to lenders than was dished out. This is good news for the Bank of England, which introduced the scheme just over a year ago in a bid to lift the sluggish economy. But the prognosis for businesses is not so rosy. While the Bank of England has not released a breakdown between business and mortgage lending, the evidence is pretty strong the money has mostly been funnelling into mortgage lending.
Recently released figures pointed to a drop in small business lending in the second quarter. Meanwhile, the housing sector is currently receiving a much-publicised boom, with the availability for cheaper mortgages increasing and homebuilders, such as Bovis and Taylor Wimpey, recording bumper first half profits. Add to that the Help to Buy scheme, which is also pumping extra credit into the housing market.
The breakdown of which banks are lending more, only cements this conclusion. The banks recording the largest rise in lending figures are Nationwide Building Society (+£2,261m) and Lloyds (+£1,281m), which owns Halifax Building Society - both traditional mortgage lenders. RBS (-£2,793m) and Santander (-£1,768m) are lagging behind.
‘The Funding for Lending scheme has bathed the mortgage market in cheaper credit, but has left the small and medium enterprise market parched and arid,’ said Richard Sexton, director of E.surv chartered surveyors. And as we all know, cheaper mortgages don't produce much in terms of jobs or growth, they just push up house prices.
The Bank of England has promised to start publishing the breakdown between mortgage and business lending though FLS from next year and claims the scheme is working, saying lending would have contracted in the second quarter had it not been for the scheme.
It also pointed to some amends made to the rules in April, which were introduced to encourage more lending to businesses. It said these were made too late to make a difference to second quarter results but would be more evident in the coming months.
A change is certainly needed, and quicksmart. While analysts are worried about a housing bubble being created by the extra funding flooding the mortgage market, small businesses are struggling to find the funds they need to grow – and that ain’t good.