Why critics of banks on SME lending could be grossly missing the point

Anthony Browne
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THE GLASS is too often half empty in the great debate on bank lending to small and medium-sized enterprises (SMEs). But are some of the loudest voices not seeing the full picture?

It’s hardly difficult to find critics suggesting that SMEs have little chance of securing a bank loan. So you may be surprised that official figures show that borrowing by SMEs was 28 per cent higher in October than a year before. A flash in the pan? No, lending on the same measure is up 16 per cent over the past three months.

Most economists and pundits focus on net lending when talking about SME borrowing, but this does not give the complete picture. Essentially, this measure looks at all the loans approved by banks and then deducts the total amount of lending repaid by SMEs over the same period. On this measure, aggregate net lending at the moment is slightly negative.

The numbers I cited earlier are gross lending figures, which do not deduct the repayments made by customers on loans. I’ve thought that looking at SME lending in this way is more realistic for some time. After all, this debate centres on whether banks are getting money out the door to businesses. The gross figure must be a more appropriate measure of that.

In fact, shouldn’t it be good news if some businesses are paying down debt? The outstanding stock of loans has indeed fallen by 23 per cent since its peak. But why should that be used as a stick to beat banks with for not lending, when in reality they are? Businesses have been too dependent on loans as a source of finance. Alternatives such as asset finance and invoice finance are often more appropriate, and these alternatives are growing rapidly.

It also seems odd that many important players in the debate are wedded to using net lending for SME borrowing when they happily use a gross measure for mortgage data.

I wouldn’t try to present myself as a lone voice crying in the wilderness on the argument for gross lending. In recent weeks, the Bank of England has highlighted this measure of SME borrowing. It’s also a point that has been made publicly by the Treasury.

This stuff really matters. It may sound like one for the stattos of this world, but this distinction poses a real challenge to the recovery. I feel for the small business owner who reads in newspapers or sees public figures on television pronounce that banks are not lending to small businesses.

In such circumstances, is it surprising that he or she sits on their hands rather than apply for the loan that would allow them to grow their business, buy some new kit, or hire extra staff?

This phenomenon is often referred to as “discouragement” and there’s compelling evidence to suggest that it’s a real problem. Research by BDRC’s SME Finance Monitor shows that these firms are twice as likely to get a bank loan approved than they think. And yet the truth is that banks want to lend – that’s how they earn their crust. This is a very good environment for businesses to seek credit. Rates are at historic lows and eight out of 10 SME loans are approved.

The glass really is half full on business lending – in fact it’s rather more than that.

Anthony Browne is chief executive of the British Bankers’ Association.