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Banks join Osborne's lending scheme for small businesses

Lloyds, RBS, Barclays and Santander join scheme to make it cheaper for small and medium-sized businesses to borrow money.

Banks join Osborne's lending scheme for small businesses

Chancellor George Osborne again trumpeted Britain’s safe-haven status today, as he launched a £20 billion scheme intended to increase lending to credit-starved small and medium-sized businesses.

The ‘credit easing’ scheme will allow UK businesses with a turnover of less than £50 million to access loans at 1% less than the interest rate they would otherwise be charged by a bank.

Britain’s banks have been under pressure for failing to meet lending targets. Figures published by the Bank of England in February as part of the government’s Project Merlin deal showed that total net lending from the five main UK banks' fell in every quarter of 2011, while they missed their lending target to small businesses.

Part taxpayer owned banks Lloyds (LLOY.L) and RBS (RBS.L), as well as Barclays (BARC.L) and Santander, are participating in the scheme, while new bank Aldermore has ‘agreed in principle’ to join, the Treasury said in a statement one day before the chancellor delivers his Budget. HSBC however said it was 'unable to participate on commercially viable terms' because it does not access the wholesale markets to provide lending to UK businesses.

The first tranche of the ‘National Loan Guarantee Scheme’ will see the government provide £5 billion in guarantees to these banks for unsecured borrowing, ‘using the UK’s budget credibility in financial markets’, a benefit which they must then pass on to businesses.

‘It’s only because we’ve earned credibility with our deficit reduction plan that we have low interest rates, and it’s only because of this scheme that we can pass the benefits of those low rates onto businesses,’ Osborne said in a statement announcing the launch of the scheme.

There will be no minimum loan size, though the Treasury stated that very small loans may not be available due to the administrative costs to banks.

John Maltby, commercial director at Lloyds Banking Group said the scheme's real benefit will come ‘through its potential to rekindle confidence, stimulate demand and encourage investment - all of which are vital ingredients of recovery and growth’. 

There were however immediate criticisms of the scheme, with Philip Booth of the Institute of Economic Affairs, a think tank, arguing it is fundamentally flawed: 'One of the major causes of the financial crash was the US government underwriting mortgage borrowing. This government is repeating that mistake with small business borrowing. By subsidising one particular approach to lending - that is lending financed through wholesale markets - the government is also subsidising a specific model of banking which is the very model that failed Northern Rock.'

When Osborne delivers his Budget tomorrow, it is expected to be fiscally ‘neutral’, with little scope for the chancellor to deliver new spending plans without cutbacks elsewhere. He does, however, have slightly improved economic growth prospects on his side, with the independent Office for Budget Responsibility reported to be preparing to raise its GDP forecasts.

2 comments so far. Why not have your say?


Mar 20, 2012 at 16:37

Fiddle faddle, rather than semantics, increase the interests rates paid to investors, a large number of whom are the silver brigade who will spend the increased money thereby circulating the money faster than loans to 'a few' businesses and the which the small businesses will undoubtedly benefit from.

True borrowers will be hit, but the savers outnumber the borrowers by 8:1, so the spenders spending will more than make up for the loss of 'a few' borrowers reducing their spending.

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Truffle Hunter

Mar 20, 2012 at 16:53

As a beneficiary 30 years ago of the Government Loan Guarantee Scheme I really dont know what all the fuss is about. This is Mrs Thatcher's and Sir Geoffrey Howe's idea from all those years ago.

My only comment would be that many people took advantage of the scheme but did not repay the loans in the same spirit in which the money was lent. My business and many others thrived, but there were an enormous number of less than honest businesses that took the money and folded within a year or two, after the loan money had been used up. The system was thoroughly abused to such an extent that the conditions for such loans were made near impossible to reach.

I just hope that the losses from future guarantees are minimized.

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