Small business hit as RBS siphons off non-core borrowers

Bankers say that they're lending more to SMEs - but RBS may be trying to lose some customers...

Last Updated: 31 Aug 2010

Many of RBS’s SME customers are so unprofitable that it’s trying to transfer them into a ‘non-core’ division, according to a report in today’s Times. Apparently the state-controlled RBS is making so little money out of these loans – which were doled out at extremely generous interest rates during the boom times – that they want to siphon them off into a separate section, where they’ll presumably receive much less attention than their more profitable brethren. In a week in which the British Bankers Association again trumpeted its members’ support for small business, this is a timely reminder that we’ve still got a long way to go…

The Times has got its hands on an internal RBS memo, sent out last week to managers in its small and medium-sized business division, explaining that it wants to divide customers into two groups. It hasn’t quite worked out how yet, but it will clearly be on the basis of how valuable their custom is. For instance, some have been borrowing money at 2% above base rate – and since RBS’s cost of borrowing is more than that, it’s effectively making a loss on every loan. So perhaps not surprisingly, it wants to get shut of these at the earliest possible opportunity.

The bad news – particularly for those in this non-core division, which apparently is likely to include most firms who’ve taken out loans on property – is that they’re unlikely to get any more cash out of RBS unless they agree to a much higher interest rate on their existing loan. And if they refuse to pay and look elsewhere, the Times suggests they’ll have to disclose that their previous application has been rejected – thus affecting their chances of another bank coughing up.

Small business groups are crying foul, but in some ways this isn’t a big surprise. Part of the reason why RBS got into this mess is that it shelled out too much money at overly-generous rates. So it follows that it can only get itself out of this mess by getting this business off its books – as per its previously announced plan to run down about £240bn of toxic assets via a ‘bad bank’.

The BBA said on Tuesday that lending to small businesses rose by £287m in April, with 48,000 new relationships established. But with the banks (particularly those under state control) trying desperately to rebuild their battered balance sheets, it seems inevitable that SMEs are going to find it hard to borrow at decent rates for some time yet.

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Small business hit as RBS siphons off non-core borrowers
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