Financial support for small and medium-sized enterprises - Business and Enterprise Committee Contents

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 Yorkshire Bank.

  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 environment—we speak to thousands of small businesses every day and it is very tough out there—in 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 demand—not 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 to support.

  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 confidence—again, 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 market—the banks, accountants regulators, other parts of government, and the development agencies—work 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 only element.

  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 as well.

  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 customers—who 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 investment—and that was a point Peter had made earlier—and 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 a recession.

  Q55  Mr Binley: That is where the difference comes between loan and using their bank account overdraft facilities.

  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 facilities.

  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 businesses—and we are still seeing plenty of businesses looking to expand and grow—is 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 slowdown—it is still happening, just not as much as previously—and 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 all—and I think it is fairly similar with other banks—80% 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 the same.

  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.

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