The scheme will work by guaranteeing the debt of those banks that lend most to SMEs, on the condition that they pass on the full benefit of lower debt costs in the form of lower interest on the loans they offer. The Treasury has not yet determined which banks will participate and on what scale.
Osborne said yesterday that the treasury is now negotiating for “[EU] state aid approval so that the National Loan Guarantee Scheme will be up and running in the next few months”.
He will hope that the approval process is speedy – the treasury is keen to implement it quickly to combat a credit crunch. However, many European Commission initiatives have been hit by delays recently due to it being overloaded by new regulatory changes and the Eurozone crisis.
The government will also contribute £1bn to the Business Finance Partnership, a fund for investing in SMEs, a cause close to business secretary Vince Cable (pictured).
Despite the government taking on billions in risk, it will be kept off-balance sheet in the national accounts as a “contingent liability”, and will not affect the national debt, the Office for Budget Responsibility said.