Examination of Witnesses (Questions 46-59)|
16 DECEMBER 2008
Q46 Chairman: Lady, gentlemen, welcome
to this evidence session on finance for small- and medium-sized
businesses. We are having a very sombre session this morning,
which I think it is appropriate in the circumstances, but we are
looking forward to what you have to say. Could I begin by asking
you to introduce yourselves so that we all know who you are.
Mr Cooper: Steve Cooper. I am
the Managing Director for Local Business in Barclays.
Mr Maltby: I am John Maltby, Managing
Director of Commercial Banking at Lloyds TSB.
Ms Peacock: I am Lynne Peacock.
I am Chief Executive, Clydesdale Bank, which also incorporates
Mr Ibbetson: I am Peter Ibbetson.
I am Chairman of Small Businesses for Royal Bank and Nat West.
Q47 Chairman: I should say two things
from the Chair. First of all, the fact that you four are here
does not mean that there is particular significance in that. We
would like to have had all the banks represented but we could
not do that, and so we have chosen a representative group. No
blame or shame or credit attaches to being here; it is just a
selected group. I should also declare the fact that I have just
completed an Industry and Parliament Trust with the Royal Bank
of Scotland. That is not a financial declaration but it does mean
that I know the bank rather better than I do the other three.
Perhaps I could begin by asking each of you one question. You
are under attack quite often for not lending enough sums of money
to small businesses. We have heard a very measured, I think, description
of the situation from representatives of those small businesses
in our last session. What are the constraints you are under when
deciding how much you can lend? I am thinking of things like capital
requirements, Basle, preference shares. What are the issues that
constrain your lending ability?
Mr Cooper: First of all, in the
knowledge that we are in a very difficult trading environmentwe
speak to thousands of small businesses every day and it is very
tough out therein terms of lending to small businesses
or lending to the market in general, I think there is a little
misunderstanding in general as to what some of the challenges
are. Yes, banks are being asked and have agreed to increase their
capital ratios quite significantly, and are doing that, and at
the same time trying to lend more money to the overall market
to provide needs there. I think in the mortgage market there are
some issues around supply. There were 300 providers of mortgages
18 months ago and now there are less than one dozen. In the SME
market, my view is that at the smaller end there is not a supply
issue around access to finance. For larger businesses, and I am
talking typically of business that have a staff of 250 people
or more, there is an issue. On that basis, certainly from Barclays'
point of view, I have no issues around capital constraints in
terms of lending to smaller firms. To the larger SMEs, I think
there is in the market a degree of capital issues. Half of the
credit to the larger SMEs has historically been provided by foreign
banks, equity markets, hedge funds, et cetera. They are not there
any more. One of the previous panel members referred to £200
billion worth of loans or debts to larger companies which is due
for repayment in the next 12 months. Not only is that due for
refinancing but, equally, for people who are looking to get access
to that money, those participants are no longer there. There are
those challenges facing the overall sector.
Mr Maltby: At Lloyds TSB we do
not have a constraint on our lending to small and medium businesses;
indeed, we have grown our lending this year some 18% to that sector.
We do see the points that you make, that there are increased capital
requirements. Those come from Basle and they also come from the
recapitalisation. That has not affected our ability to lend to
this sector. Probably the biggest thing that affects how much
our lending will grow will be the quality of opportunities that
are put in front of us. In a recessionary environment, not all
businesses are in the same viable position that they might have
been in in more benign environment, so we see that as more of
a constraint in terms of the credit quality rather than the availability
of capital in this sector.
Ms Peacock: Chairman, without
repeating the points, Clydesdale and Yorkshire only lend in the
SME sector. We are a much smaller bank, this is the only sector
within business in which we operate. In our financial year ended
30 September, our lending in the business area increased by about
20%, so we are not seeing a reduction. However, I think there
are some factors since then that are maybe causing this perception.
First, the market has become very difficult. We are still approving
nine out of 10 credit applications, but the number, particularly
in the property sector rather than in the SME sector per se, has
declined. I do think we have seen some reduction in demandnot
as much as within the mortgage market, but certainly, in our experience,
some of the smaller banks, the foreign banks that were around,
are not around, so maybe that is what is causing some of the feedback
that the Committee is receiving.
Mr Ibbetson: The question of capital
was raised in the last session as well. There is a balance. We
do have to balance the allocation of capital and where we apply
that capital. I agree with Steve: we do not have a constraint
at the SME level. The pressure, if we see pressure, would be much
higher up the tree than at the SME level. I do not believe there
is a constraint per se from the banks. I do agree with the other
comments: we have seen exits from market, so the Icelandic banks
are no longer there, and there is quite a gap that they have left.
There are issues on asset financing: the residual values of assets
have declined, so there are constraints there. I think the only
real constraint we see is in businesses coming through the door
of the quality that we would like. We have not in any way changed
our principles in lending: our bar is exactly where it has been,
but virtually every SME by definition at the moment is facing
difficulties and the quality of the client coming through the
door is declining.
Q48 Chairman: I want to understand
what I have been told, before I hand over to Brian Binley. You
are saying that there are some very real constraints on the ability
of banks to lend coming from Basle, increased capital requirements,
12% insurance rates on preference shares, requirements to rebuild
capital in addition to Basle as a result of the way that capitalisation
has been conducted, but those constraints are not going to impact
on SME lending because ... ? Why?
Mr Ibbetson: The portfolio we
have as a bank, lending to all kinds of sectors at all kinds of
levels, is very, very big. The SME sector is a portion of that
but it is not an enormous portion of that, to the extent that
we can continue supporting that sector. As a commercial perspective,
as a bank, it is an important sector for us. There are 4.7 million
businesses across the country and we have about 1.2 million of
those. It is an important sector for us which we can continue
Chairman: I am in danger of treading
on Brian Binley's territory a bit too much, so I think I will
hand over to him.
Q49 Mr Binley: We have already said
and the Chairman has heavily intimated that the banks need to
raise extra capital and are facing a riskier economic background.
There is no doubt about that. How do you balance the need to maintain
lending to support the economy? How do you balance that? What
would you want the Government to do to help you do that more effectively?
Ms Peacock: From our perspective,
we are constantly trying to balance the needs of our small business
customers, our personal borrowers, and of course our savers. We
have, for example, 10 times the number of savings accounts than
we do borrowers. It is a constant balance. We have tried to grow
our lending prudently. We have had to raise extra capital. We
have done that from within our group, but within the difficulties
of the market it is something that we believe we can balance.
As far as the initiatives are concerned, I think they are all
helpful. My personal view is that there is not one single initiative
that is suddenly going to transform the situation. There are a
number of things that are all helping. I think one of the things
that would help is that we cease to receive more bad news from
around the globe and we see a gradual return of confidence.
Mr Maltby: We do welcome the initiatives
that have been brought to bear, we do welcome the attention that
has been brought to bear onto this sector. It is an important
sector for us as an organisation and clearly for our customers.
I think that there are a couple of areas where we would like to
see further work and further initiative. One is in the area of
prompt payments, and I think that is something that was touched
on in the previous session. We do think that that is an issue
that is increasing the challenges on working capital of small
businesses. The second is about confidenceagain, something
that I know was touched on in the previous session. There are
good businesses out there that are doing well, there are good
businesses that are having a challenge and are having a tough
time, and I think it is important that all parts of the marketthe
banks, accountants regulators, other parts of government, and
the development agencieswork together to support that.
I have seen encouraging signs over the past few weeks. That is
something that would underpin confidence and I think that is going
to be very helpful.
Mr Cooper: They are very good
points. There is another area where I would like to see some more
work done. Some businesses are really struggling, and it may or
may not be due to lack of cash. Quite often it is due to their
business model not working in today's environment. A typical example
I would give is of a restaurant that is empty. Whether you double
or triple or quadruple the funds that restaurant has, that on
its own is not necessarily going to make more people eat in that
restaurant. I think businesses need help to understand what they
need to do to make their restaurant more attractive to the consumer
on the high street, whether that be reviewing why they are going
to the restaurant next door or what the customers want. I think
that is a combination of help from banks, advisers, accountants,
and I think both public and private sector have a role to play
in that in terms of helping the business community to think that
way and to take on board the advice and the support they need
to do that. Finance is one element of that, but it is not the
Mr Ibbetson: There are two main
things I would mention here. One is liquidity and the other is
investment. We are not seeing an awful lot of investment, by a
long straw, at the moment. We would like to see that.
Q50 Mr Binley: Does that mean more
encouragement for savers? Is that what you are saying?
Mr Ibbetson: No, I am talking
about investment in the refrigeration units which will grow the
business and those sorts of things. That is very, very quiet at
the moment. Liquidity is the key issue. Today SMEs wake up in
the morning and worry about their liquidity far more than they
worry about their investment. Immediately we need to focus on
the liquidity side. I think as banks we are doing that, we understand
that. We are working closely with the businesses doing that. I
think government understands that as well. The Small Firm Finance
scheme that was introduced will help, but, as John has said, it
is wider than that; it is trying to get the debtors to pay on
time and it is all of those issues. It is addressing that liquidity
piece that is the important thing. One other comment I would make
is that only one in three SMEs do borrow. The other two-thirds
do not have bank lending, they run in credit most of the time,
and a big need that they have at the moment is the advice. Many
have not been through a recessionary time before. We should not
ignore those businesses and we do need to provide advice to those
Q51 Mr Binley: Absolutely. I would
like to move on to ask my second question, and you will have heard
me asking a similar question earlier on. The banks say that lending
has not decreased, yet the Government and business organisations
say that access to credit has got harder. From your perspective,
what is happening here?
Mr Ibbetson: Year on year we are
lending more to the SME market, so lending has not decreased and
it has increased.
Q52 Mr Binley: Are you talking there
up to, let us say, a period three months ago and not taking into
account the last three months, which have been pretty hectic?
Or are you saying up to this present time?
Mr Ibbetson: Up to this present
time, year on year, our lending has grown. It is fair to say it
is slow but it has grown year on year. We are seeing the other
providers exiting the market, so I think it is right to say that
access to finance, access to support has declined One of the big
frustrations we have is the applications that we are getting are
much lower than we have seen in volume before, so we are about
15% down on applications year-on-year, but we are about 40% down
in volume year-on-year, so even those coming to us for support
are asking of less.
Ms Peacock: We are seeing a difference
between the property sector, where I think things are incredibly
subdued, and general trading businesses. We are seeing a difference
as well between our existing customer activity and new applications.
New credit applications are probably down by about one-third,
whereas we have not seen much of a change in activity amongst
our existing customerswho we keep very closely to.
Q53 Mr Binley: You are telling us
that small businesses are not coming to you for help and in fact
that has dropped down rather than increased. Is that what you
are telling me?
Mr Maltby: Maybe I could make
a distinction. I think there is a distinction between businesses
coming for help in terms of new investmentand that was
a point Peter had made earlierand those organisations that
need support in terms of working capital, for all the reasons
we have talked about, including extended payment
Q54 Mr Binley: A one-off cash-flow
hit and that sort of problem.
Mr Maltby: Yes. We have seen that
increase. In fact our overdraft volumes have increased 10% this
year. We have also increased overdraft limits for existing customers.
We are seeing a shift in the requirements for small businesses
away from investment, particularly in sectors like property, through
to working capital, which is what we believe we would expect in
Q55 Mr Binley: That is where the
difference comes between loan and using their bank account overdraft
Mr Maltby: It is. One of the other
major shifts and one of the measures that we use is the utilisation
of their overdraft. A small business may have a £10,000 overdraft
but how much of that is drawn down? We have seen that that has
increased. The overdraft utilisation in our business has increased
from some 55% to now nearly 60% over the period, but that still
means that on average our customers have 40% of their overdraft
that they have not yet drawn down, and one of the things that
we have committed to in our recent charter was not to remove those
Q56 Mr Binley: Thank you. Do you
have anything to add?
Mr Cooper: I think a couple of
measures may help. With 20% market share, we are seeing, through
bank accounts, businesses paying in about 6% less year-on-year,
so that is a good barometer that businesses are generating about
6% less cash than a year ago. To put it into context, that is
the biggest contraction we have seen in about 20 years, so it
is pretty tough. That means that the number of businessesand
we are still seeing plenty of businesses looking to expand and
growis down year-on-year in terms of that type of investment.
People are holding back. I spoke to a manufacturing company in
the North yesterday. They are expanding and they want to buy their
factory but they have decided to wait a year to see what happens
to the price. It may go down. They are seeing what happens in
the future with interest rates. They may go down. They are looking
at opportunity in terms of exchange rates and what may happen
there in terms of their exporting capability. A number of people
are just being cautious in terms of what may happen going forward.
We are seeing a little bit of new investment slowdownit
is still happening, just not as much as previouslyand there
is some stress around the working capital requirements, where
businesses are collecting cash less quickly and so do need finance
for that. The businesses that are more marginal in terms of their
viability are now being stretched, and they are the ones which
are struggling in terms of their access to finance to tide them
over. In reality, what they need to consider is: "Is my business
model correct for today's environment."
Q57 Mr Weir: You mention that businesses
are not coming to the same extent for investment, but we get complaints
from small businesses that when they do go to the bank the cost
of getting credit or loan finance is increasing. I have had businesses
coming to me saying that, whilst it is not increasing, they are
not getting the benefit of falling interest rates. When the Bank
of England has dropped the interest rate, all that has happened
is that the commercial banks have put up their cut, if you like,
so the overall interest rate is exactly the same when they come
for a new loan. (a) can you comment on that and (b) if that is
the case what is the point in the Bank of England slashing interest
rates if the benefit is not getting through to business?
Mr Cooper: First of alland
I think it is fairly similar with other banks80% of our
business customers are borrowing linked to base rate and they
get the full change in base rate passed on immediately. That is
contractual in our arrangements with them, so, whether it is up
or down, they get the immediate benefit of a base rate change
immediately. For the 20% of customers who do not get that, they
have chosen themselves to have a fixed rate, and they have chosen
that to give them certainty of finance costs.
Q58 Mr Weir: I had a constituent
who had base plus 2.5%. They went for a new loan when the base
had fallen by 1.5%, but, instead of getting base plus 2.5%, they
were quoted base plus 4%; that is, a 7% interest rate was exactly
Mr Cooper: Yes.
Q59 Mr Weir: The effect, when they
applied for a new loan for new investment in equipment, was that
they were getting no benefit from the drop in interest rates.
How is that fair?
Mr Cooper: It is good banking
practice, good regulatory practice to price for risk: the higher
the risk, the lower the rate; the lower the risk, the lower the
rate. We have seen in Barclays that for about 15% of our customers
the risk profile has deteriorated and for some of those customers
there has been an increase in the interest rate. Equally, another
15% have seen a reduction. The vast majority have seen no change
at all in terms of bank spread or bank margin, and they have received
the full benefit from the base rate reductions. The vast majority
of small businesses are seeing real reductions in interest rates.