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.