Banks pitch £4bn credit easing plan

BANKS have pitched a credit easing scheme that would flood small businesses with up to £4bn of new loans within a year of being launched, City A.M. has learned.

In a confidential policy paper sent to HM Treasury last week and seen by City A.M., Britain’s biggest lenders have proposed a plan that would see the government provide up to £800m to cut the cost of borrowing for small and medium-sized businesses (SMEs).
Chancellor George Osborne announced a desire to cut the cost of credit for SMEs early last month, but has not said how it could work.

The paper, written by banks, says it could slash the price of credit for SMEs by an average of 100 basis points by insuring tranches of securitised SME loans.

The £800m would be channelled through a new SME investment facility deployed by Capital for Enterprise Limited (CEFL), an existing government-run venture capital firm that invests in SMEs.

Under the plan, CEFL would either buy or guarantee chunks of SME securities with the aim of drumming up demand for the products. Its purchases could also be targeted at industry-specific securities to, for example, stimulate SME manufacturing or technology.

Among the other suggestions mooted in the policy paper is a greater degree of cooperation between banks, credit unions and the state-funded Community Development Finance Association (CDFA), which advises and lends to SMEs that cannot get cash elsewhere. But banks say that the £60m funding awarded to the CDFA by the government is “relatively modest” and could be boosted to £200m, which would finance 20,000 start-up loans.

However, despite the list of suggestions, behind the scenes, banks are sceptical that credit easing can make a big difference in the short-term because they don’t believe that a short-term lack of credit is the main factor holding back SME growth.

Instead, they say, the scheme could amount to little more than a series of tweaks to mitigate the impact of much higher capital requirements, which are pushing up the cost of credit in Europe on a macro-economic level.

On a longer timescale, the UK must lobby for changes to Basel III rules so that SME lending is less heavily penalised, the banks suggest.