'Funding for Lending's come a cropper,' says E&Y Item Club

Lending to British businesses is set to rise for the first time in four years, reckons the influential forecaster. But it's no thanks to government's flagship lending scheme.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
Finally, some good news on the credit front for UK firms. According to the Ernst & Young ITEM Club, an independent economic forecaster, lending to British companies will rise 3% to £440bn this year, after several years of contraction.

This is a bolt out of the blue from E&Y. Britain only narrowly escaped a triple dip recession last week, with the economy growing a measly 0.3%. Food prices and inflation continue to rise even as real pay and consumer confidence falls. Other research into the UK’s lending environment have all been overwhelmingly damning, with access to credit for SMEs falling by £4.8m in the first three months of the year. In 2012 alone, lending values shrunk 5% to £427bn.

But this is all about to change, says E&Y. ‘Behind the scenes, banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy,’ explains Andy Baldwin, head of financial services in Europe at E&Y. And the positive lending trend will reach beyond this year, with loans expected to rise by 8.5% to £477bn in 2014.

The ITEM Club seems to be cautiously forecasting a genuine economic recovery by the tail-end of this year. It reckons that the uptake of loans will increase, and that British firms will be paying down their debts at the same time. Not the most familiar coupling: taking out more loans while paying off more loans... Nonetheless, bad debt write-downs are predicted to fall to £9.3bn or 0.56% of total loans this year, from £11.6bn in 2012.

Unfortunately for business secretary Vince Cable, the improving lending environment has nothing to do with his Funding For Lending scheme. E&Y’s Baldwin even went so far as to say that the wheeze would make no ‘material difference’ to firms’ access to credit.

‘Our analysis suggests the main drivers of banks' return to lending will be better access to wholesale funding and a decrease in non-performing loans, rather than the Funding for Lending Scheme making a material difference,’ was his withering turn of phrase.

This will come as no great shock to government, however. It was forced to overhaul the terms and conditions of the scheme last week. Latest data showed that while Funding for Lending was proving useful for mortgage-seekers, businesses – especially small firms - were being left out in the cold. High street lenders are now being offered £10 of state-subsidised funding for every £1 they lend to small companies this year to sweeten the deal. The FLS has also been extended to 2015, just in case its poor performance to date is due to being ‘a bit slow off the blocks’.

Still, it’s good to know that even without any economic lever-pulling by government, the UK economy could be on the mend. Although we do stress the ‘could’…

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