Let local bank managers hold the purse strings

As banks digest the latest interest rate cut, the FSB demands an end to central credit committees.

Last Updated: 31 Aug 2010

With small businesses still struggling to access finance, despite six interest rate cuts, the Federation of Small Businesses reckons lending decisions should be taken by local bank managers, rather than faceless central credit committees. The FSB’s latest member survey found that 86% of respondents want decisions about their loans to be made locally, while over 60% were unhappy with the service they’re getting, partly because they don’t get to talk to real people – the majority said they prefer to communicate face-to-face rather than via phone or email (like people used to in the old days). And let’s face it: the current approach hasn’t worked terribly well for the banks, has it?

Although the Bank of England has slashed interest rates six times since October, including Thursday’s cut to 0.5%, many complain that they’re not seeing the full benefit of these lower rates. To be fair, this isn’t entirely the banks’ fault – as long as the inter-bank lending rate has remained stubbornly high, they can’t really be expected to lend money at a loss. And the true picture may be slightly different: according to the British Bankers’ Association, total bank lending to small firms actually increased by £235m to £54.2bn in January. But the fact remains that many SMEs still think they’re getting a raw deal on their borrowing.

‘While there have been efforts to restore lending to small businesses, the FSB is still hearing negative reports about banks holding back funds from viable small businesses,’ said chairman John Wright. ‘Businesses are complaining of unrealistic terms on finance applications and that they are not able to speak directly to those making decisions on their credit issues’. It’s put together seven principles of best practice ‘as a way to mend the broken relationship between small businesses and their banks’, including fixing terms on loans that aren’t in breach, making it easier for firms to access state guarantee schemes, and producing a letter of explanation if requests are turned down.

However, the Forum of Private Business reckons the biggest worry is the fall in SME bank deposits. Even as lending inched up in January, total deposits fell by £1.5bn. That’s nearly twice as much as it did in the first four months of 2008, points out FPB CEO Phil Orford, and it far exceeds the small rise in lending. ‘This disparity shows the urgent need for real liquidity measures,’ says Orford. So it looks like we’re all crossing our fingers that this quantitative easing will have the desired effect – albeit more in hope than expectation...

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