THE GOVERNMENT has been dealt a blow in its flagship credit scheme for small businesses after it failed to get all of the UK’s major banks on board.
HSBC, which accounts for 15 per cent of the small business banking market, will not participate in the National Loan Guarantee Scheme (NLGS) unveiled today because the structure of the programme makes it uneconomical for the lender. Co-operative Financial Services and Clydesdale Bank will also not take part.
But it was not all bad news for the government yesterday – UK growth figures from the independent Office for Budget Responsibility are expected to show a better-than-expected forecast of 0.8 per cent expansion this year, up from 0.7 per cent in November.
The OBR’s stats are due to be released alongside tomorrow’s Budget.
Despite some banks withdrawing from its plan to boost growth, the Treasury still intends to forge ahead with the credit scheme and will deliver £20bn in guarantees in £5bn tranches over the next two years. Both state-owned lenders RBS and Lloyds as well as Barclays, Santander UK and small-time business lender Aldermore have agreed to take part.
Chancellor George Osborne says the policy will get the cost of borrowing down by one per cent for small firms with affected loans.
But the Treasury has not set any kind of target for how much it expects borrowing to increase as a result or how it will otherwise measure the success of the scheme.
HSBC and others were prevented from participating in part by European rules requiring them to pay a charge to do so.
The scheme works by lowering the cost of banks’ wholesale funding by giving a government guarantee on some of their debt. They are then required to pass on that saving to small businesses.
But because HSBC funds its lending out of customer deposits – a practice being encouraged by regulators and by the bank balance sheet levy – its cost of wholesale funding is too low for a subsidy to make a difference.
The fee to participate in the programme means HSBC would actually have to pay to take part. The bank said it “supports the aims” of the policy but that it is “not commercially viable”.
Those that do take part will have to pay the government the full benefit of the guarantee, although they are likely to be able to pocket a little to pay their administration costs.
A Treasury source said that the attraction for them was to expand their market share via the scheme.