Memorandum submitted by Barclays
Barclays welcomes the opportunity to participate
in the Business and Enterprise Regulatory and Reform Select Committee's
inquiry reviewing the impact of the Government's support packages
to ease access to finance for businesses.
I will be representing Barclays, in my capacity as
Managing Director of Local Business Banking, at the Committee's
oral evidence session on 2 June 2009. I set out in this letter
further information on our operations, views on business banking
in the current climate and our experience to date of the Government's
support packages. As noted below, given that the majority (approximately
85%) of SME customers are in Barclays Local Business division,
this response focuses mainly on businesses within our Local Business
division, but naturally we are happy to respond to any question
on SMEs and Barclays activity within this sector.
EXECUTIVE SUMMARY
Small to Medium-sized Enterprises (SMEs) are
suffering the sharpest contraction in business conditions for
a generation. Many of Barclays SME customers have never experienced
such difficult circumstances before.
Barclays is working hard to support as many of these
customers as possible through difficult times including, where
appropriate, providing additional loan and overdraft finance.
We have already increased lending above our 2007 levels, despite
a reduction in the number of customers seeking finance. The modest
increase in loan applications in recent months reflects in part
the introduction of the Enterprise Finance Guarantee (EFG).
Barclays has a continued appetite to provide
finance to SMEs at our current levels as a minimum (these levels
already being higher than in 2007). In April this year Barclays
announced its intention to increase lending to its UK business
customers, subject to customer demand, commercial terms and credit
criteria. This includes a £1.5 billion increase in lending
specifically earmarked for small and medium-sized enterprises,
which will increase our SME lending stock from £15 billion
to £16.5 billion if loan demand conditions improve.
We particularly value the Government support
made available to help underpin our activities in providing finance
to SMEs and have been an active participant in championing the
new initiatives:
— we are committed users of European Investment
Bank (EIB) funding in the UK; and
— we are fully involved with BERR in shaping
the EFG and have actively marketed this since January 2009. Based
on CFEL data, as at 6 May 2009, Barclays had made 34% of all the
loan offers under the scheme to date and reported 28% of all EFG
loan drawdown in the UK. Currently our sanction (loans approval)
rate stands at more than £1 million per day.
Barclays views the EFG as a useful tool to support
lending to viable businesses with insufficient security and feels
that it is a workable solution for the targeted segment, as indicated
by the successful implementation of the scheme outlined above.
However, it should be noted that loan guarantees are not a panacea
for all firms. Businesses need to change and adapt to market circumstance
and this may include closure. Also, intervention via loan guarantees
should not replace action in other areas, such as timely debtor
payments from larger organisations.
1. INTRODUCTION
TO BARCLAYS
BUSINESS BANKING
OPERATIONS
1.1 Banking support for the small and medium
sized (SME) business sector is a central part of Barclays banking
operations, reflecting Barclays origins in the 1670s as a source
of entrepreneurial finance. The Committee's hearing represents
another important opportunity to focus on the needs of SMEs in
the current economic downturn, in addition to the recently established
BERR Small Business Finance Forum, of which we are a member.
1.2 In the UK, Barclays broadly categorises its
SME customers as follows:
— smaller firms with a turnover up to £1
million are typically within the Local Business banking division
of Barclays; and
— larger SMEs with a turnover more than
£1 million and up to approximately £20 million are typically
within the Medium Business unit (MB) of Barclays Commercial Banking
(BCB) division.
1.3 For the purposes of this submission,
references to SMEs means customers of Local Business combined
with MB customers within BCB, whilst unless specifically noted
otherwise references to "small businesses" and "larger
SMEs" are references to Local Business and MB customers respectively.
1.4 The majority (approximately 85%) of
SME customers are in Barclays Local Business division. This response
focuses mainly on businesses within our Local Business division,
but naturally we are happy to respond to any question on SMEs
and Barclays activity within this sector.
2. BARCLAYS RESPONSE
TO CURRENT
MARKET CONDITIONS
2.1 Barclays commitment to the UK SME sector
— Barclays is very much committed to SME
businesses. In 2008, more SME customers switched their relationships
to Barclays than left us, leading to a growth in our SME customer
base despite a general contraction in the marketplace. We are
also seen as one of the top banks for start-ups.— In line
with this account growth we have seen increases in our engagement
with this marketplace. Our SME customer stock has increased by
over 17,000 during the last year. Our lending origination to SME
customers under £1 million turnover has increased by more
than 8% per year to date (to end March 2009) and even after refinancing/repayments
made, our stock of SME loans was still 4% higher than a year before.
Within this overall level of support, loan origination to small
business customers under £1 million has increased at an even
faster rate and in Q1 2009 was at a level 26% higher than in the
same period of 2007.— Through its relationship teams, Barclays
is committed to taking fast and decisive action to help SMEs through
the economic downturn.
— Our relationship managers are available
for customers to discuss the best way we can help their businesses.
For example, on average every working day in Q1 2009 our staff
had nearly 1,800 face to face meetings with customers. Also, we
sanctioned a new small business loan or overdraft every 66 seconds,
based on the number of loans agreed during the course of a year.
2.2 We offer high quality products and advice
2.2.1 Barclays overall approach to SMEs
is to provide a blend of financial products and invaluable business
advice to construct solutions that meet the needs of customers:
— A choice of small business accounts that
they can tailor to their needs and the provision of up to two
years free banking to start-ups, subject to remaining in credit.
— Day to day small business banking support
through a team of Business Managers who are available over the
telephone for everyday and urgent banking needs during the daytime,
evenings and weekends.
— Free consultation for small businesses
with a local accountant, marketing expert and solicitor to advise
on topics such as the best legal status, how to advertise or draft
supply contracts.
— Barclays offers a free nationwide small
business seminar and workshop programme. This is designed to help
small business owners network and gain practical help on relevant
challenges such as marketing, trading online or how to generate
more business profits.
— Business management software has also
been developed to help small business customers complete their
account work quickly and efficiently, support hiring, help back
up business data securely and avoid late payments and bad debts.
— Creditfocus is an innovative web based
service provided to small business customers to help reduce the
risk of late payments and bad debts, with elements of the service
provided to customers for free. Businesses often encounter issues
as a result of late payment of invoices and bad debts. Creditfocus
is a tangible example of how Barclays is reflecting a strong understanding
of its customers' needs in our product development. In November
2008 Creditfocus won the Institute of Financial Services (IFS)
Award for Innovation Excellence.
— Barclays customer satisfaction levels
for relationship managers remains high. In Q4 2008, more than
two thirds of customers surveyed were either very or extremely
satisfied with the service they received from their manager.
— For our larger SMEs we provide a more
sophisticated offering in terms of product set and services. For
example, our teams are increasingly industry focussed, with staff
undergoing training to become specialists in a particular sector.
This enables relationship managers to be customers' trusted business
partners, helping them identify opportunities and manage risks
more effectively. Furthermore, this year we have launched the
Barclays Latitude business club which offers products and advice
to support business development and growth, domestically and internationally.
2.3 Key features of Barclays lending strategy
to SMEs
2.3.1 There has been considerable focus
in press commentary about lending to small businesses. Over a
typical business lifespan, about 60% of small businesses will
need to borrow money for one reason or another (even though only
a minority are borrowing at any one point in time). In some industry
sectors, access to working capital is an almost perpetual requirement.
In other sectors, debt finance is more associated with business
development opportunities.
2.3.2 Our lending strategy is summarised below:
— In spite of difficult market conditions
Barclays lent more money to SMEs in 2008 than in 2007 and this
trend has (to date) continued into 2009.
— In the case of small firms with less
than £1 million turnover, new lending flow to businesses
is up by more than 11% year-on-year to end March (much better
than the market as a whole which actually contracted slightly
in Q1 2009 compared with a year earlier).[1]
— Across our SME customer base as a whole,
Barclays loan stock increased by 4% in the year to March 2009,
despite the evidence of a much weaker economy and customer cashflow
than a year ago.
— Barclays has a continued appetite to
provide finance to SMEs at our current levels as a minimum (these
levels already being higher than in 2007). In April this year
Barclays announced its intention to increase lending to its UK
business customers, subject to customer demand, commercial terms
and credit criteria. This includes a £1.5 billion increase
in lending specifically earmarked for small and medium-sized enterprises,
which will increase our SME lending stock from £15 billion
to £16.5 billion if loan demand conditions improve.
— Barclays charges for debt on a risk adjusted
basis: higher rates for higher risk customers; lower rates for
lower risk customers. During 2008 we increased rates for a small
number of businesses and reduced rates for a similar number whilst
the vast majority remained unchanged. As a result of our policy,
customers representing lower/improved risk do not subsidise others.
— Base rate movements are passed on in
full to all base rate linked borrowing customers (approximately
80%).
— Barclays ensures that up front lending
fees are communicated clearly and in advance. Any other fees are
clearly articulated in our tariff charges and we actively explain
to our customers how to save money.
— Barclays maintains a consistent approach
to risk, lending responsibly. Risk decisions are made jointly
by centrally based credit experts and locally based relationship
teams.
— We treat each business on an individual
basis with no "blanket" policies for industry sectors.
— We are leading users of EIB funding in
the UK passing the full benefit on to SMEs.
— We are fully involved with BERR in shaping
the EFG and have actively marketed this since January 2009.
3. BARCLAYS PARTICIPATION
IN GOVERNMENT
SUPPORT SCHEMES
3.1 Enterprise Finance Guarantee
3.1.1 Since the Government's launch of the
EFG on 14 January this year, Barclays has supported this scheme.
The latest CfEL weekly data up to 6 May 2009 highlights that Barclays
had made 34% of all the loan offers under the scheme to date and
reported 28% of all EFG loan drawdown in the UK. Currently our
sanction (loans approval) rate stands at more than £1 million
per day.
3.1.2 Between 14 January and 6 May 2009, Barclays
has approved almost 1,500 loans, totalling just over £100
million. As a result, Barclays is on track to utilise our allocation
of EFG facilities in this financial year.
3.2 European Investment Bank
3.2.1 On 16 December 2008 Barclays signed up
for the latest EIB funding line of £150 million. This continues
a 15 year history for Barclays of offering EIB schemes to customers
as cash backs.
3.2.2 Between 16 December 2008 and 31 March 2009,
Barclays has generated the following EIB related activity:
— 782 applications for term finance agreed
eligible for the scheme (totalling £120 million); and
— 256 applications have already gone through
to completion and the cash back has been paid to customers (£26
million has been drawn down as loans with £157,000 paid out
as cash back).
4. BARCLAYS SPECIFIC
COMMENTS ON
POINTS RAISED
BY THE
COMMITTEE
4.1 Is the threshold of an annual turnover
of £25 million for applicants correct?
4.1.1 CfEL data on split by turnover supports
Barclays view that no significant demand exists for a higher turnover
threshold. The data demonstrates that only 2% of EFG origination
has been generated by customers from within the £10-25 million
turnover band.
4.2 Is the amount of money available reasonable,
so enabling businesses to continue operating?
4.2.1 It is felt that fixing the maximum EFG
loan amount at £1 million is appropriate as an additional
credit line for a viable £25 million turnover business where
we have already reached the maximum capacity to lend on normal
commercial terms.
4.2.2 However, the individual lender Customer
Action Prompts (which we understand were based on historic Small
Firms Loan Guarantee origination) may be worth reviewing to reflect
current actual EFG origination if significantly different.
4.3 Are loan guarantees the best method of
addressing the difficulties some businesses face in accessing
finance and, if not, what is the best method?
4.3.1 Loan guarantees are a useful tool to support
lending to viable businesses which have insufficient security
or in some other respect do not meet other requirements of our
normal commercial criteria (eg track record or personal stake).
4.3.2 However, loan guarantees are not a panacea
for all firms. Businesses need to change and adapt to market circumstance
and this may include closure. Also, intervention via loan guarantees
should not replace action in other areas, such as timely debtor
payments from larger organisations.
4.4 Will loan guarantee encourage new lending
by banks?
4.4.1 Loan guarantees do not themselves
encourage new lending on normal commercial terms as banks wish
to lend and continue to do so.
4.4.2 Rather a scheme such as the EFG allows
a bank to provide a loan in circumstances where firms do not quite
meet our normal commercial requirements.
4.5 How well have Banks promoted the scheme
to its staff?
4.5.1 Following the announcement of EFG
under the working title of Small Business Finance Scheme, communications
were delivered in December 2008 to all of our customer facing
Relationship Managers. These were subsequently followed up with
a programme of face to face training and support prior to the
external communication of the scheme on 14 January 2009. All 2,000
branch managers were made aware of the scheme through regular
conference calls.
4.5.2 Additional targeted communication has also
occurred since launch, sometimes to clarify criteria issues (eg
around taking security).
4.5.3 Furthermore, Advance, Barclays partly-automated,
account behavioural lending decision tool, has been upgraded to
automatically prompt branch teams to consider EFG and remind them
of its criteria and the associated application process. A reminder
banner now appears for all decisions on mainstream lending that
we would usually decline, asking the relationship manager to consider
EFG.
4.5.4 EFG now forms an integral part of
our product set and is recommended to eligible customers where
we wish to lend but the borrower cannot meet our commercial supporting
security requirements.
4.6 Are businesses in some areas of the UK
having more difficulty in accessing the scheme than businesses
in other areas?
4.6.1 It is too early to have detailed data
but our impression is that any regional variations in use reflect
underlying differences in the business stock rather than any variation
in implementation by banks.
4.7 Does applying to the scheme create an
administrative burden on those applying?
4.7.1 Apart from the state aid declaration there
is no difference from a customer experience perspective when compared
against a normal loan application.
4.7.2 Additional steps involving the CfEL web
portal should add only a day or so to Barclays internal activities
between sanction and loan drawdown.
4.7.3 However, it should be remembered that
perfecting the necessary guarantees and forms takes time for any
loan application and it is a requirement of our contract with
CfEL that we do not treat EFG customers any differently and due
diligence is followed.
4.7.4 Since launch, we have tried to balance
the due diligence process with the need for the customer to access
funds and we have where possible streamlined the process to improve
the customer experience further. As a result, average lead times
from loan approval to loan drawdown are expected to reduce from
22 days to 16 days in the future but are currently still at the
higher level.
4.8 How effective has been the promotion of
the scheme to businesses?
4.8.1 Initial publicity for the scheme from
Government and small business trade groups was extensive. However,
it soon became evident that crucial details of the EFG proposition
had been misinterpreted by certain audiences; this suggests the
communication has been sufficiently wide to generate awareness
although may have suffered in terms of clarity. The key area of
confusion was about the question of security and any personal
guarantee.
4.8.2 However, given the pace and urgency at
which the scheme was launched, it is perhaps understandable this
happened and it should be noted that clarity around the application
criteria and scope of the scheme has improved post launch.
22 May 2009
1 BBA monthly press release-January to March 2009. Back
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