Enterprise Finance Guarantee scheme - Business and Enterprise Committee Contents


Memorandum submitted by the Royal Bank of Scotland Group

EXECUTIVE SUMMARY

    — The Royal Bank of Scotland Group, which includes NatWest and Ulster Bank is the largest supporter of the Enterprise Finance Guarantee (EFG) Scheme. We currently have £149 million of EFG loans already agreed or in the pipeline.— We are committed to ensuring that like its predecessor, the Small Firms Loan Guarantee Scheme, the EFG is widely accessible to our Small & Medium sized business customers (SMEs) and that our Relationship Managers are able to identify opportunities where EFG can improve the availability of working capital or support lending for business growth.— So far, the Royal Bank of Scotland Group has advanced almost £69 million (48% of all EFG loans drawn.

    — The purpose of this submission is to inform the Committee about the role that RBS has played in supporting businesses through delivery of the EFG and our progress to date.

THE ORIGINS OF THE SCHEME

  1.  The Enterprise Finance Guarantee was introduced in January 2009 and replaced the previous Small Firms Loan Guarantee scheme (SFLGS). The Royal Bank of Scotland Group had been the most significant user of the SFLGS with a market share of c 38% (across both RBS and NatWest brands).

2.  The Enterprise Finance Guarantee is a facility for SMEs intended primarily to improve the availability of working capital through term loans and the consolidation of overdrafts while also supporting lending for business growth and development in cases where a sound proposition may otherwise be declined due to a lack of security.

  3.  Initial discussions on the design of the EFG were held in early December 2008 and detailed scheme parameters were provided to lenders in mid-December. The EFG was formally launched on 14 January 2009 and implementation was achieved in challenging timescales. From start to finish, the speed of the EFG launch was significantly quicker than would usually be the case for a new product.

  4.  There was pressure from SMEs, Government and business organisations to launch the EFG scheme as soon as possible. One of the biggest challenges this created was ensuring our staff were familiar with the scheme. RBS put in place a comprehensive education and communication exercise to ensure staff at the frontline understood the EFG and could recommend it to customers where appropriate. The first loan approved under the EFG was sanctioned less than a week after the formal launch of the scheme.

THE SCOPE OF THE SCHEME

  5.  At launch, EFG broadly mirrored SFLGS in terms of general eligibility, although an increased maximum loan amount of £1 million and maximum business turnover of £25 million was introduced, an increase from the the thresholds which were applicable to SFLG of £250,000 and £5.6 million respectively. The Government provides a 75% guarantee for qualifying loans which allows lenders to provide finance to eligible and viable businesses. At launch, the scheme was restricted to term lending, so that the scheme could be carried forward quickly. This scheme does not replace lending that would have been granted anyway—except where a consolidation of existing overdraft debt is restructured into an EFG Loan. When this happens we are required to extend a working capital line (by overdraft) at a value deemed appropriate by the bank.

6.  Sector eligibility was widened by the Government with effect from 1 March 2009, with many of the business activities restricted by SFLGS being eligible for EFG finance, thereby increasing the scope for use of EFG across a wider range of SMEs (eg wider eligibility within Healthcare). RBS welcomed the widening of EFG eligibility, in particular the simplification of sectoral eligibility and this has enabled us to support more businesses. Notification of this was given to lenders on 23 February.

  7.  The funding available to RBS under the EFG is broadly in line with our market share of SFLGS, however it is higher than our overall share of the small business market (sub £1 million turnover business) which was 26% in Q4 2008 (source: TNS). Although the Government provides a 75% guarantee, claims are capped at 9.75% (net on a portfolio basis and not advised to Relationship Managers). This is a state aid consideration and has not restricted lending under the EFG. Overall, at current run rates, we expect to utilise our £380 million allocation, a view confirmed by BERR through the recent audit undertaken by Ernst & Young.

  8.  We are satisfied that the EFG parameters cover the majority of our business customers who are in need of the guarantee scheme. This is evidenced by the small number of requests for support at the upper end of these limits. Furthermore, we have not received any feedback that the upper ceiling of support is too low. Our average loan amount £118k is above the national average of £85k. We have also provided four loans at the scheme maximum amount of £1 million.

THE APPLICATION PROCESS

  9.  The typical application process for an EFG loan is as follows:

    — The local Relationship Manager discusses finance needs with customer outlining all available options including a possible EFG loan.

    — The Relationship Manager makes an application to the credit unit to confirm a viable business proposition exists.

    — Credit unit confirms eligibility and sanctions the EFG loan.

    — The Relationship Manager then offers the loan to the customer.

    — The final stage is where the customer, having met any required conditions of sanction, draws the loan.

  10.  We are aware of the criticism of the industry regarding an apparent disconnect between "head office" pronouncements and front line experience of the time taken to draw down an EFG loan. Currently 83% of all RBS EFG loans are drawn within three weeks of the initial record being made of the loan. Once sanctioned, however it is possible to significantly expedite this time line should the borrower make themselves available to sign appropriate paperwork.

  11.  An EFG loan will typically draw quicker than a non-EFG loan of a comparable amount, as there will generally be fewer pre-drawdown security conditions to meet (ie no solicitor's involvement to take a legal charge). However, we have recently undertaken an internal review of our own end to end EFG process to identify where time savings can be made.

Table 1

TIMEFRAME TO DRAW DOWN EFG LOANS (%)


RBS PERFORMANCE (INCLUDING SECTOR AND REGIONAL BREAKDOWN)

  12.  Since the launch of the scheme, the Royal Bank of Scotland Group has led the field in taking applications for the Enterprise Finance Guarantee scheme with over £149 million worth of loans already agreed or in the pipeline. Of all EFG lending across the industry NatWest and RBS are responsible for almost half of all loans drawn down totalling almost £69 million.

13.  We have seen a significant take up of EFG across the country. We have seen particular demand for the EFG in Scotland, the Midlands, North West, South East and London. In the Midlands, we have seen a significant number of EFG loans supporting the manufacturing sector. Scotland has seen significant demand in the healthcare sector. RBS Group has seen consistent growth in the rate of application since the scheme was launched.

INTERNAL COMMUNICATIONS

  14.  RBS has undertaken a programme of communication with frontline staff to ensure they understand and can provide details of the EFG to business customers. In particular there have been:

    — Regular written and oral communications to frontline staff to increase knowledge and awareness of the EFG.

    — All staff briefings held in branch with Business Relationship Managers (all retail branch staff have been asked to confirm they have had and understood the EFG briefing and all Retail Branch Managers have confirmed they have delivered the EFG message to staff).

    — Business Relationship Managers have been tasked with raising EFG awareness in branches they cover.

    — EFG case studies and policy update information sent to frontline staff.

    — Regular reviews with Business Relationship Managers to help embed best practice and ensure consistency.

    — Senior Directors coaching Business Relationship Managers to verify their understanding of the EFG.

    — Detailed information on the EFG posted on internal group intranet.

    — EFG marketing literature for customers available in all branches.

  15.  To determine the extent to which the four major banks were providing businesses with appropriate information about EFG, BERR commissioned a mystery shopping exercise, including both telephone and face-to-face interviews, during 2-13 March. This exercise highlighted that 95% of NatWest/RBS Business advisors had a good or adequate knowledge of the scheme. This is significantly higher than our peer average of 73%. However, the same research showed some weaknesses in understanding of the EFG among some branch staff.

  16.  To ensure our customers were receiving high levels of service, RBS commissioned our own mystery shopping exercise to check understanding and processes used by retail branch staff (Customer Service Officers and Cashiers) in handling EFG enquiries. This identified that further work needed to be done with retail "receptionist" staff for which a detailed action plan was agreed and implemented. A further mystery shop conducted as a follow up exercise demonstrated significant improvement. In the second phase of our mystery shop, we found that there was a significant improvement in the recognition of the scheme in the response of retail staff to queries on the EFG. We will continue to carry out our own mystery shop exercises at regular intervals to ensure we continue to improve awareness even further.

EXTERNAL COMMUNICATION

  17.  RBS have taken a very proactive approach to promoting the EFG scheme to new and existing customers in a variety of ways:

    — The EFG was advertised prominently as part of our £3 billion Regional Funds initiative in which we have launched 12, £250 million local funds across England, Wales, Scotland and Northern Ireland (through Ulster Bank). Adverts which featured the EFG appeared in three to four local newspapers for each of the 12 regions. The advertisements appeared four to five times in each of these publications over the period of the campaign. We also advertised on billboards in our key locations. At a national level there was also online paid advertising.

    — As part of the regional funds initiative RBS produced a practical guide entitled Helping your Business in 2009. This guide details the existing products and services from the Bank and the support that is available through EFG. During February we also mailed out 150,000 copies of the Helping Your Business in 2009 guide to small and medium sized businesses. We are also making copies available to the British Chambers of Commerce for use by their members.

    — We briefed key opinion formers in the national and regional media on the workings of the scheme, and success in making new lending available to SMEs. We helped to raise awareness of the scheme by profiling customers who have benefited from EFG lending on a regular basis in national and regional media.

    — We produced a video podcast on the workings of the scheme and how to apply on SME networking site Smarta.com.

    — We have produced customer literature explaining the key features and benefits of EFG. These were distributed to branches and business centres during April.

    — We are currently undertaking a two month in branch lending campaign where EFG and the EIB Loan Scheme for SME's are extensively publicised.

CURRENT ISSUES

  18.  There has been some public debate on the subject of Personal Guarantees. At RBS we have been very clear that Personal Guarantees will be taken from shareholders/LLP members who own a significant proportion of an applicant's share capital. Such guarantees will generally be for 25% of the loan amount, although this figure may be amended, subject to Credit agreement, depending on the risk profile of the borrower. Credit Policy is also clear in that we will not support Personal Guarantees by a charge over a guarantor's principal residence.

19.  To improve the service to our customers and shorten the time taken to access scheme funding we have undertaken a review of our EFG operational processes. A number of actions have been identified which will require the support of Capital for Enterprise Ltd to deliver including simplifying the customer application form and exploring ways to use electronic delivery of scheme documentation. We are already working together with Capital for Enterprise Ltd to deliver these improvements and support them in their own review of EFG processes.

May 2009







 
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Prepared 24 July 2009