Credit easing to boost reliance on big lenders

MICRO-BUSINESS funding organisations are becoming increasingly reliant on major banks for capital, a trend that could be accelerated by the government’s credit easing policy.

New data for 2011 seen by City A.M. shows that banks now provide a fifth of the capital used for lending by Community Development Finance Institutions (CDFIs), non-profits that lend to around 19,000 entrepreneurs and small firms (SME) per year.

Banks have proposed to the government that CDFIs should be key to its credit easing plans, which aim to get more money into SMEs. But instead the Treasury decided to channel cheap SME funding through major banks, with lenders in turn targeting CDFIs.

Figures for the year to April 2011 show that CDFIs’ total capital for on-lending has dropped by 17 per cent to £28.5m compared to the previous year. The share of that capital provided by banks has jumped from 13 per cent to 21 per cent as state-run Regional Development Authorities, formerly a major source of funds, were abolished.

The shift suggests that credit easing could merely change the route by which some state-backed capital gets into SMEs rather than the amount.

Banks are also in talks with CDFIs about a “referral system” to redirect SMEs rejected for loans to CDFIs.