Examination of Witnesses (Questions 200-219)
BARONESS VADERA
12 MAY 2009
Q200 Mr Oaten: What should it be?
Baroness Vadera: It is about £30
million to £35 million a week.
Q201 Mr Oaten: What should be the
waiting time? You have 3,000 in the pipeline. How long is the
pipe?
Baroness Vadera: There are two
pipelines. When I was talking about delay I was referring to the
fact that banks had two weeks to log onto our system, so there
is a lag in picking up the data. That was the one I meant. In
terms of businesses there are only three or four additional questions
that a business would have to answer in order to benefit under
the enterprise finance guarantee scheme, so the process needs
to be the bank's normal process of assessing credit and whether
they want to do this. There should be no additional delay, but
because in the small business finance forum there is anecdotal
evidence of delay we have investigated it and found that possibly
more than one or two banks have an additional process, which we
have taken up with them, that requires them to refer each one
back. Instead of doing it at branch level each one is referred
back to the head office, so we are in discussion with them to
try to streamline their process, but the rest of the processes
that we have done with the other banks is basically as it would
be if they just proceeded in the usual way.
Q202 Mr Oaten: I sense that we will
not get an answer to the question.
Baroness Vadera: I have answered
the question: it is the same amount of time.
Q203 Mr Oaten: No; that was not the
question. The question was: how long is it? If I apply for this
guarantee how long on average do I as a businessman desperate
for the money have to wait for a yes or no? What is the answer?
Baroness Vadera: I understand
that it is done by each bank in accordance with its own timeline.
Q204 Mr Oaten: Minister, it is fine
to say you do not know.
Baroness Vadera: Some of them
do five days; some do 20 days. All I am saying is that if I gave
you an average it would be incorrect because it does not work
like that. It is the average of what they would do for a normal
business.
Q205 Mr Oaten: But as the Minister
responsible for this sector do you not think you should have an
idea of how long businesses have to wait for this? Surely, that
is an indicator.
Baroness Vadera: I have explained
to you that it ranges from five days to three weeks.
Q206 Chairman: Do you reject what
the Federation of Small Businesses told me a week or so ago that
the normal wait is two weeks for a loan and the enterprise financed
guarantee scheme takes six weeks on average? Do you reject that
anecdotal evidence?
Baroness Vadera: We investigated
this because of our discussion with the Federation of Small Businesses
and found that in the main it is within the period that a bank
would normally do it which is between five days and three weeks.
We found evidence, however, that a couple of banks, which I shall
not name, had a lengthened period because they referred back to
the head office. We have taken that up in discussion with them
to ensure that that is shortened.
Q207 Mr Oaten: Are you comfortable
with the fact that the banks are asking for personal security
in many of the cases aside from the guarantee? Was that something
you envisaged would be required as part of the scheme?
Baroness Vadera: I would not describe
myself as comfortable, but it was certainly envisaged. We had
a long discussion and consultation with both the banks and small
business associations. It was not an easy decision to make, but
after some discussion we decided that they should be entitled
to ask for a personal guarantee but not for a primary home. The
reason for that, which was a balanced decision, was that the small
firms loan guarantee scheme was specifically targeted; it was
a very narrow and much smaller scheme. It was targeted on the
group of people who would not have security available anyway,
so it was not relevant. Almost all small firm lending, whether
or not it is under the guarantee scheme, has some form of security
provided for it. If the business has inadequate security then
personal guarantees are the norm and are required. We took the
view that we should follow normal banking practice and that if
we did not essentially we would have a situation where the taxpayer
was taking the risk that in one sense the entrepreneur was not
prepared to take if they had security.
Q208 Mr Oaten: Do you accept that
in many cases these businesses have already taken that personal
risk?
Baroness Vadera: Indeed they have,
but if they walked into a bank in a normal scenario, which would
not be the current circumstances, and were prepared to provide
a personal guarantee and had a home or property or something to
provide as security they would do so. We did not take the view
that just because the taxpayer in this instance would be standing
behind it, it was the taxpayer's job to replace what the entrepreneur
would normally have done. That was why the decision was taken.
It may not have been the most comfortable decision to make but
it was one we felt we had to.
Q209 Mr Oaten: Are you sure that
primary homes are not being required as security? You said they
were excluded, but my understanding is that they are required.
Baroness Vadera: They should not
be required. I am prepared to take up any such case. We investigated
it and in the first couple of weeks certainly errors were made.
That was when we put out a clarification. We have had a discussion
with the banks. If the primary home is already part of an existing
guarantee lending arrangement that the entrepreneur has with the
bank which is then being extended into the enterprise financed
guarantee scheme then it is rolled over; otherwise, in a new situation
it should not be included and I should like to know of any instances
where it is.
Q210 Mr Oaten: There has been a complaint
that this scheme was not particularly well publicised. Some surveys
have shown that only 9%, 10% or 15% of businesses are aware of
these guarantees. Do you think you could have done more?
Baroness Vadera: When one is asked
whether one could have done more almost always the answer is yes.
We could always do more. Within a month of its launch we conducted
a mystery shopping-type survey and we discovered that about 77%
of banks at branch level were aware of it. We have asked for it
to be increased. It is not just that small businesses should be
aware of it; the onus should also be on the banks to say to a
business that although it may not be eligible for a loan under
normal circumstances this scheme exists.
Q211 Chairman: This scheme was first
trailed in the pre-Budget Report. We took evidence from the SME
sector in December about how important it was, and here we are
in May with questions still being asked about its effectiveness.
It was formally announced on 14 January. Only last week a small
business in my constituency said that the managers of two high
street banks had been told by their bosses actively to deter people
from applying for the scheme; they would rather give them conventional
lending. Six months on there are still big questions on whether
it works. That must cause concern. You have admitted that there
are still delays in some banks in processing applications and
that must worry you.
Baroness Vadera: The delays are
simply a process issue, not an acceptance issue; it is just the
bureaucracy involved.
Q212 Chairman: But this scheme started
in the middle of November and the question should have been resolved
before Christmas.
Baroness Vadera: I do not believe
there is now a problem in terms of the availability of drawdown.
We have pretty much hit the weekly run rate we need to disburse
the facility in the timetable allowed. There is perhaps one issue
that it might be useful to discuss. There is potential misunderstanding
about the purpose of the scheme. The purpose of the scheme is
not as a substitute for conventional lending. If an appropriate
small business that would not otherwise get bank lending comes
in this scheme would be applicable. You gave the example of a
bank being deterred from lending. I do not believe that is what
is happening but if there are such cases I would like to know
about them. The guidance is that if a bank would normally without
the government guarantee provide an SME with a loan then it should
carry on and do so because our job is not to substitute for that;
it is to help those at the margins who would not otherwise be
able to lend to get them over the line. What counts is the additionality.
Chairman: My concern is that perhaps
we are focussing too much on a scheme that is very marginal. It
provides rather small sums of money when business has much bigger
demands. That is the issue we have to address.
Q213 Mr Binley: It is obvious that
we live in two different worlds. You live in a world where you
say you have received great international praise; I live in a
world where small businesses are, quite frankly, slagging you
off every week. That is the fact of the matter. I want to return
to Roger Berry's earlier question about the department not being
prepared for this. You say that it could not have been. Many small
businesses including my own—I am a non-executive chairman
of a company that employs 140 people—first started talking
about contingency plans in July of last year. We went to see our
bank in August of last year, and that practice was undertaken
by many, many small businesses. Why did not the department pick
it up when small businesses picked it up all the time?
Baroness Vadera: We did pick it
up during the Budget of last year.
Q214 Mr Binley: In November?
Baroness Vadera: No, the Budget
in March of last year. We very much focused on the needs of small
business. We have an enterprise strategy that has delivered very
significantly the things small businesses need. We increased the
then small firms loan guarantee scheme very significantly because
we wanted to deal with what we thought would be a problem. We
did not anticipate that the problem would be exacerbated during
the course of the year in quite the way it was. I am very happy
to admit that. We did foresee those issues and problems in part,
if not fully, and we made some contingency plans. I do not accept
the claim that we were completely unaware. The enterprise strategy
set out a whole number of ways in which we would be assisting
businesses in terms of access to finance, training and skills
and innovation but clearly the downturn in the banks particularly
after Lehman's collapse in September was much more severe than
anybody anticipated.
Q215 Mr Binley: You are telling me
that you had even more time which means that the management of
the process took even longer than suggested. Are you concerned
about that? What contingency might the department take in a future
situation to learn those lessons?
Baroness Vadera: I do not want
to get into a political battle about whether or not we were prepared
or we responded in a longer period.
Q216 Mr Binley: I am talking about
business.
Baroness Vadera: The real question
is: what more could we do? One interesting point is that when
we have market failures of the level, persistence and spread that
we currently have it puts the onus on the government to step in
and that places a huge strain on the resources of government.
I do not mean the financial resources but just the people in the
departments who have to deliver it. That is something we see just
about everywhere in the world we go. I think it would be a good
thing for all departments, not just BERR, to be able to access
people with the right level of expertise to deal with crises as
they arise.
Q217 Mr Binley: I leap forward to
the situation with regard to small businesses that hate loans
and work on overdraft. That seems not to have been taken into
account by the department in the way it should have been. Do you
now regret that?
Baroness Vadera: I do not think
it is true, so I do not accept that.
Q218 Mr Binley: I tell you it is
true.
Baroness Vadera: We did two things
specifically on overdrafts. The first was to ensure that, unlike
the small firms loan guarantee scheme, the enterprise finance
guarantee scheme allowed it because we understand that it is so
important to small businesses. In the classification of small
businesses up to £25 million with, say, £100 billion
of term loans and £20 billion of overdrafts, it is a very
significant portion. Some of them rely on it entirely. The second
point is that we had discussions with the banks about their overdraft
facilities well before any of the schemes and that was why there
was an announcement for example by RBS about rolling over overdrafts
and not changing the terms of them. That was followed by a similar
announcement by Lloyds and, if I am not mistaken, HSBC and Barclays.
One of the reasons we were aware of it was because of our regular
discussion with small businesses in both the small business forum
and the finance forum. That was one of the earliest points raised
and that was why it was included in both the enterprise finance
guarantee scheme and the discussions we had with the banks in
which we asked them to consider their position and they made the
announcements they did. We have found that overdrafts have remained
stable. Obviously, there is a continuing issue around pricing
and arrangement fees as there is also around term loans.
Q219 Mr Binley: There are also issues
around personal guarantees, mostly primary homes, all the time;
there are issues about negotiating fees in relation to much smaller
periods. All of those things impact heavily on small businesses,
and you will know that when the manager or owner of a small business
goes back to his or her partner and says, "We have to put
the house on the line", in many cases they say it is not
worth carrying on the business. That is the reality of the matter
at the level I live it. How will you deal with that with the banks?
Baroness Vadera: I give you the
answer that clearly you are not prepared to listen to from my
sense of it. Nevertheless, I shall try. When there are deteriorating
credit conditions it is not surprising that approval rates decrease,
but the biggest focus in the past six months has been on the maintenance
of the flow of credit. When we took all the actions we did in
terms of bank recapitalisation or the asset protection scheme
it was not to save the banks but to save the economy from the
banks as Mervyn King has said. All of these actions have been
designed to keep credit flowing. We put in place those schemes
and with the capital and funding and liquidity released from them
we have implemented lending agreements with the two banks in which
we have shares, plus we have had discussions with other banks
who have not made legally binding contracts but commitments around
lending. We now have a net increase over the past year in public
lending commitments of £60 billion to £70 billion. In
the case of those banks with which we have contractual lending
agreements they also include overdrafts that are meant to be in
the same sort of form that they would normally be conducting business
with specific commitments about overdraft rollovers, not changing
pricing in an arbitrary fashion. In the event that the enterprise
finance guarantee scheme asks for primary homes as security that
is not allowed and I should like to hear about it, but in the
normal course of events personal guarantees and security are asked
for, and always have been, so it is not something that we believe
we can step in to prevent.
Mr Binley: I should say that we live
in separate universes rather than different worlds.
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