Memorandum submitted by the West Midlands
Regional Finance Forum
SPECIFIC QUESTIONS
The Committee asked for comments on:
4. Whether businesses in some areas of the UK
have more difficulty in accessing the scheme than businesses in
other areas.
5. To what extent the loan guarantee will encourage
new lending by banks.
6. The extent to which banks are making this
scheme available.
7. Whether applying to the scheme creates an
administrative burden on those applying.
8. Whether the scheme has been effectively promoted
to the private sector.
9. Any other views stakeholders think the Committee
should be aware of.
The following are answers to the specific questions
in the light of the background analysis at Annex 1, which we believe
is relevant to a fuller understanding of the current position.
1. Are loan guarantees the best method of
addressing the difficulties in businesses accessing finance and,
if not, what is the best method?
They could be a good way but not the only way.
(a) Development banking
— The current banking system is not designed
to support all sensible financial propositions. As they are branches
of international banks they are only interested in financial propositions
and understandably are much more concerned with avoiding bad lending
decisions than missing good economic opportunities with some degree
of risk.
— Development banks are missing in the
UK Economy. They operate elsewhere in Europe and US and arguably
the present banks used to do so in part but cost and objectives
have now given them a different path. These development banks
are still trying to make a financial decision but have more the
characteristics, in assessment and objectives of the CDFIs and
the Advantage Transition Bridge fund, which currently try to fill
some of this gap.
— Assess individual risks as well as take
overall framework credit criteria.
— Have the skills, resources and time to
perform such assessments.
— Have a flexible approach to pricing and
security.
— Work alongside existing banks sharing
risks and giving some confidence to credit scoring lenders.
— Are not driven by profit maximisation
alone.
— Can use a portfolio approach.
— Are based in the community and use that
knowledge and strength in a number of ways.
— In addition, there are economically beneficial
investments, where the financial considerations are reasonable,
but do not give complete comfort. In these circumstances, especially
for small loans up to £50,000, but more so for all businesses
in more difficult economic climate the only alternative source
of finance becomes other publicly sector supported schemes eg
CDFI's and Transtion Loan Fund as evidenced by the demand they
have experienced.
— Guarantees are particularly useful when
the economic decision could be different from the financial one.
This is always the case to some degree as acknowledged by the
existence of the SFLG over many years and the existence of many
such guarantee schemes across Europe.
— It is even more the case in time of market
and economic uncertainty as exist now, as is recognised by the
EU' s encouragement to use a higher guarantee rate of 90% since
November.
— However such guarantees need to be carefully
constructed with regard to:
— Level of guarantee. The current level
of the Enterprise Finance Guarantee (EFG) of 75% is considered
too low for the circumstances. The EU currently allows up to 90%.
— Any other restriction such as caps. The
EFG sets a cap of 10% on guarantee calls by the lender, which
is tighter, then ever achieved by the old SLGS.
— Scope of the risk to be covered. The
EFG is explicitly for security risk not market risk, the major
current problem.
— Balance of risk between all the participants,
and attitude to personal security. The government guidelines on
EFG encourages the lender to take virtually all available personal
security.
Thus, it is believed that the current
EFG is flawed in all of these regards with respect the current
situation.
— Targeted guarantee funds could be used
to support lending to address public policy objectives eg start-ups
in disadvantaged communities or early growth funds using existing
providers.
2. Whether the amount of money available is
reasonable to enable businesses to continue operating?
— There appears to be £1.3 billion
of Government loan guarantee available for smaller companies.
Clearly the overall requirements are practically impossible to
calculate but the Banks of England April 2009 report suggested
many ways in which credit had been need and constrained including
the withdrawal of many foreign lenders. Anecdotally there are
many businesses that require extra working capital just to survive
because of the drastic reduction of demand.— Actually because
of the terms of the guarantee and the guidance on security this
intervention appears to be probably less than £100 million
of government cash. This is nowhere near enough and could be argued
to be recklessly cautious in its approach. At the moment the intervention
is likely to cost even less because the terms of the guarantees
described above seem to be reducing the amount that is leant even
below the government ambitions. There seems to be a far greater
emphasis on the cost to the scheme than the economic effect that
is needed.
— However, should take up increase there
is a need to provide clarification on whether additional funding
would be allocated to the EFG if the £1.3 billion was fully
utilised before any new scheme/funding is put in place and the
extent of flexibility to alter the allocations made to individual
lenders.
— Early decisions need to be made on any
successor scheme so it is ready to avoid any hiatus or uncertainty
over the criteria etc.
3. Is the threshold of an annual turnover
of £25 million for applicants correct?
— For an ideal scheme this would be too
low and certainly there are companies with higher turnovers who
would benefit from a genuine guarantee scheme, as has been demonstrated
by the requests for loans by many big players. However the terms
of the current scheme are so tight that it is difficult to see
them being used by any of the participants.— It is interesting
to note that currently the average lent is around £80k compared
with a potential of £1 million. Less than 10 loans have been
above £250k.
4. Do businesses in some areas of the UK have
more difficulty in accessing the scheme than businesses in other
areas?
Yes most certainly. It varies between banks,
sectors and regions to a degree.
— This is inevitable as the assessment
of risk within an industrial sector and within a region is essentially
a subjective process and attempts to make it a formulaic one tends
to drive extremes, either too great an appetite as seen in the
period 2003-07, or overly restrictive as now being experienced.
Given this, it is inevitable that access to credit will vary from
bank to bank and from region to region within individual banks.
— In addition, the guidelines are not easy
to follow and still do the job that the government says the EFG
is doing.
— We consider that banks and businesses
need to be provided with clearer and more generous guidelines.
These include the use of the EFG to cover market risk in addition
to a lack of security, the treatment of security and use of a
family home. This is particularly important if Transition Funds
cease to operate.
— Current numbers suggest that in comparison
with the numbers of Vat and Paye registered businesses the West
Midlands is around the best region for both numbers and values
of EFG loans.
5. To what extent will the loan guarantee
encourage new lending by banks
— The EFG was announced as designed to
encourage lending beyond the old SFLG in size and scope. The evidence
of this happening is limited at present and really except for
the size of businesses involved and the up to £1 million
limit there is little in the scheme that should encourage new
lending. Less than 10 loans have been outside the scope of the
old SFLG scheme.— It is not expected to encourage lending
below £25k and probably £50k which will remain the domain
of the CDFIs to service.
— As the EFG is structured we believe the
encouragement to lend is marginal with assessment of viability
of an applicant being the major limiting factor. Most of the potential
eligible applicants will have existing highly geared balance sheets
and the banks' appetite to add to the debt burden will be limited.
The acknowledgment/realization by business managers that recent
levels of debt are not sustainable going forward remains the major
block to bank/customer relationships being restored. The transition
period will provide inevitable pain.
— The major curent new risk is market based
and that is not explicity allowed under the scheme.
— If the credit risks can be overcome the
banks' are showing no great willingness to rely upon the Government
Guarantee and the suspicion is that this view is being driven
by the portfolio cap.
— It would be helpful if BERR was able
to communicate examples of innovative approaches to the use of
the EFG as it becomes aware, and to clarify how EFG can be used
in conjunction with Invoice Discounting.
6. The what extent are the banks making this
scheme available?
There has been some uplift in last eight weeks
with the banks implementing training for local managers and responding
to feedback/mystery shopping but the position taken up is variable
between banks and within regions of the bank.
— Sector plays a huge part in credit risk
assessment, automotive supply chain specifically within the West
Midlands.
— Security requirements in respect to personal
guarantees are highly variable but the request to catch the business
owner's prime residence as security within the overall lending
proposition is virtually always present.
— It would be interesting to see what the
statistics show for loans delivered by size band and in particular
for those under £50,000, as evidence from CDFIs in the Region
show that demand for their loans has tripled in the last six months
and there remains further eveidence of ongoing increased demand
being seen.
— Without having access to publicly available
statistics showing the regional split of lending by banks, by
size and by sector split it is difficult to answer this and also
have a meaningful discussion with lenders. It is, therefore recommended
that BERR/Capital for Enterprise should publish these on at least
a monthly basis.
7. Does applying to the scheme create an administrative
burden on those applying?
— A common failing of many businesses seeking
support from the Transition Loan Fund has been the lack of management
accounts and appropriate forecasts. Requests for provision of
such are often seen as administrative burden rather than as an
essential management tool. Our perception is that this applies
to an approach to the banker and indeed weak presentation of the
company's requirements is often believed by the Transition Loan
Fund management as being a major contributor to a bank's refusal
to lend. The bank relationship managers do not have the time to
structure adequate presentations for their credit teams to review.—
This emphasises the need for awareness raising of funder's requirements
and help with ensuring that propositions are "finance"
ready to be available.
— Difficulty—There is evidence at
a bank level that requests for additional funding leads to a closer
examination of trading performance and risk analysis and longer
decision making process as referrals are made and additional questions
asked by the bank's credit managers.
8. Has the scheme has been effectively promoted
to the private sector?
— More can always be done but the concept
of the Scheme has a wide audience and the varying interpretation
of what an acceptable proposition looks like is causing much of
the uncertainty. Private sector-advisors generally know about
it but have become frustrated through lack of use and understanding
initially in the banks.— We still consider more could be
done to raise awareness of the Scheme, its criteria and its take
up among SMEs as there is evidence that many are not even approaching
the banks due to ongoing negative publicity that they are not
lending.
9. Other views the Committee should be aware
of
See Annex 1
10. Summary
— There is evidence that we need different
institutions such as Development Banks as the existing clearing
banks with their strict and ambitious financial objectives have
not been providing the requirements of SMEs for some years in
good times and bad.— If wider economic objectives are being
supported eg start up enterprises in disadvantaged communities
and/or job creation and preservation, then there is an additional
case for publically supported institutions.
— Guarantees can be a very useful tool to help
economic decisions instead of mere financial ones. The terms of
the guarantee must fit the situation and must be much more generous
in times of economic problems as at present.
— The current EFG is flawed in a number
of respects, as it seems to be designed fro minimum cost rather
than maximum economic benefit, consistent with value for public
money. The weaknesses in design, because it is so short of reasonable
expectations impacts badly on the EFG perception by the business
community and the public, and its actual operation. In addition,
most detailed considerations are affected by this specific design
and therefore such questions, in isolation, are difficult to answer.
— A holistic cross-governmental approach
must be taken to guarantees, if the costs of one department and
the benefits of the whole economy are to be balanced. We appear
not to be doing that.
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