Examination of Witnesses (Questions 60-79)|
16 DECEMBER 2008
Q60 Mr Weir: Surely, what you are
saying is the risk has increased. Surely, in a recession, for
the vast majority of small businesses the risk will have increased,
therefore the vast majority coming for new loans will find that
they are having to pay more to get these loans. Is that not the
truth of the matter?
Mr Cooper: For a small number
of businesses the risk is increasing. For the vast majority it
is not, or not changing materially to reflect in a change in the
interest rates on whatever their borrowing is. I go back to the
stats we are seeing: the vast majority of our customers are seeing
a real reduction in their interest rates.
Q61 Mr Hoyle: What Mr Cooper says
is interesting. If I have got it right, the majority of your customers
have benefited from not only the cut in base rate but what they
are paying over and above base.
Mr Cooper: The margin they are
paying over and above base is broadly unchanged over the past
Q62 Mr Hoyle: So they have not gained
Mr Cooper: They have gained in
Q63 Mr Hoyle: I know base rate but
it is what you are charging above base rate.
Mr Cooper: It is broadly unchanged.
For some customers it has gone up marginally; for some customers
it has gone down marginallydepending on their risk profile.
The vast majority have seen no material change in the margin they
are paying over
Q64 Mr Hoyle: So it is business as
usual, with no benefit.
Mr Cooper: The benefit is coming
from overall rates in the market. They are receiving benefit from
falling base rates.
Q65 Mr Hoyle: You are saying that
some have had above base rate increased, but those that have seen
that increase are those you see where they are most at risk.
Mr Cooper: Yes, but that is a
very small number.
Q66 Mr Hoyle: Presumably they need
the most help. What we are saying is that those who need the most
help get the least help, but get the extra charges. Is that right?
Mr Cooper: No, I do not accept
that. What they are doing
Q67 Mr Hoyle: I did not think you
would accept it, but ... .
Mr Cooper: Risk has to be priced
appropriately. Our shareholders would be concerned if we did not
do that, as clearly would our savers be concerned as well. We
are trying to make sure that we pass a rate to any customer, in
their agreement, which is both appropriate for the risk and they
are able to afford
Q68 Mr Hoyle: In their agreement?
But we all know they have no choice: it is take it or leave it,
because nobody else is going to take them on. In fairness, it
is like playing Russian roulette with a bullet in every chamber,
is it not?
Mr Cooper: There is choice. It
is a competitive market.
Q69 Mr Hoyle: The other big concern
we hear aboutand I have to say we hear a lot about tit
but never get a lot of proofis that if overdraft facilities
get too high you try to capitalise that. I do not know whether
that is the case. I would like you to comment on that. The other
is that you try to force people into factoring, which is a very
expensive way for doing business. Is that the case?
Mr Maltby: First, I think that
we do not force customers into factoring. For some customers it
can be a preferable source of finance because, as a facility,
it grows with the size of their business. Indeed, the cost of
factoring today is not a huge amount different from the cost of
overdraft for many customers. In terms of the facility itself,
certainly from Lloyds TSB, as I mentioned earlier, our overdrafts
have grown by 10% year-on-yearand it is, Chairman, up until
the end of October this year, so we have seen those increases.
I mentioned earlier that we have not seen any reductionin
fact we have seen an increasein interest in having overdrafts
and our ability to be able to service them.
Q70 Mr Hoyle: Do the banks benefit
from people factoring? Is it good business or bad business for
Mr Maltby: It is a different line
of business. It does open up an opportunity potentially
Q71 Mr Hoyle: It is good or bad profit?
Mr Maltby: It is broadly the same
profit as an overdraft loan. It does mean that sometimes when
somebody uses factoring it can increase the amount of working
capital that we can provide because that factoring is secured
on the debtor book whereas most overdrafts are unsecured.
Q72 Mr Hoyle: Only for a period,
and then you take it off and you take it off the next set of invoices.
Mr Maltby: Effectively, it is
a revolving facility that is secured on the debtor book which
moves and evolves as debtors
Q73 Mr Hoyle: It is only as good
as the factoring people behind it who are willing to chase the
Mr Maltby: Indeed. Indeed.
Q74 Mr Bailey: I would like to tease
out this issue about risk and loan rates. I suppose this is specifically
directed at Mr Cooper. You said that it was a very small number,
effectively, which had their rates of interest increased or not
reduced in line with the reduction in bank basic rate. Given the
current climate, the impression that I am getting is that there
are far more companies at riskand certainly I am getting
reports from manufacturers that there are. Is your decision related
to the change in the macro economic climate, or the specific business
models that you have had to live with for this particular company
throughout your business relationship with them?
Mr Cooper: I think that is a good
question. First of all, I want to stress that any change in base
rate does get passed on to the borrower. In the cost
Q75 Mr Bailey: It would be compensated
for by an increase in the surcharge, if you like.
Mr Cooper: In part, for some,
Q76 Mr Hoyle: So it is a myth.
Mr Cooper: How risk is priced
is based on, one, the industry that business is inso there
is a macro element on that. The other element is: What is the
business model on that particular business? As someone on the
earlier panel said, within any industryand we have no blanket
policies in place for any sectorthere are good businesses
and there are bad businesses. The primary weighting on this is
that where there is a bad business model we work as hard as we
can with that business, so that they are encouraged to adapt their
business model. In some cases, a loan may be more appropriate.
If a business has been trading with losses and is sitting on an
overdraft facility which is now really solid, actually there is
financial benefit to that business in transferring it to a loan:
(a) it is cheaper and (b) that loss gets repaid over time.
Mr Bailey: I have a follow-up question
and there are two angles to this, particularly relevant to the
current climate. First of all, on the basis of your experience,
is the Government action to stimulate consumer spending (the so-called
fiscal stimulus) helping to improve, if you like, the viability
of those businesses? Second, where there is still risk and a danger
of businesses going under, how do you think government can engage
in reducing that risk in order to prevent businesses from going
Chairman: That ties in with some of the
questions other colleagues want to ask later on. Can we see if
those questions are addressed by colleagues and come back if they
have not been answer satisfactorily?
Q77 Mr Bailey: At least the second
question is perhaps not so wide.
Mr Cooper: I think the Finance
Forum is a good initiative. We welcome the debate we have had
there. The Small Business Support Fund is a good initiative. We
have worked hard with government, as have colleagues here, to
help shape that and it is very nearly ready to go. Plus the European
Investment Bank, we have had talks about that. So I think there
are some good things happening.
Mr Bailey: Okay. I am going to come on
to those later.
Q78 Chairman: Could I just say that
I am finding this all rather surreal. We do have a whole string
of anecdotes about problems that companies are experiencing. The
Institute of Chartered Accountants gave us a detailed list of
anecdotesI know they are anecdotesabout problems
all from the West Midlands. Three of us are from the West Midlands
and they are from the West Midlands examples. A solicitors' practice
found a leading high street bank withdrawing its overdraft and
offering no further advances. A manufacturing company which employs
110 people has been asked by a leading bank to pay off its £75,000
overdraft and it will close as a result. This is an extraordinary
one: a leading bank wants to renegotiate an existing loan to a
charity with a very strong asset base from base plus 1.5% to LIBOR
plus 3.5%, and charge four times more on arrangement fee. For
a company supplying homeware, the bank reduced the overdraft by
one-third and refused to reassign a personal guarantee on the
departure from the board of the guarantor. As a direct result,
the company called in receivers. These are the anecdotes that
are coming up from the real world, and yet you are telling us
statistically it is all splendid. I really would like to see more
sight of those statistics and how many companies are having falling
interest rates and loans, how many are having increased interest
rates, how many are having increased negotiation fees at the small
and medium-sized level. There is a disconnect here between the
anecdotes we are getting from the real world and what you are
telling us. I find this really difficult to understand.
Mr Ibbetson: I hear the same anecdotes.
I spend quite a bit of time going round and speaking to businesses.
I have a fair degree of experience in businessI have recently
been invited back into banking having spent five years at the
coal face as a director of businessesso I understand the
issues that are being addressed there. I categorise into three
the situations we are seeing a lot of the time. There are some
very good businesses which are not suffering, which are not having
any problems, and we are addressing those very easily as business
as usual. They are not a problem. There are some at the other
end of the scale where there clearly are problems, and those businesses,
even in a very good economic cycle, would not survive, and that
is part of the business. There is a whole raft of businesses in
the middle. Those in the middle are the ones that are having problems
with their debtors, are having cash flow problems, have not been
here before, do lack the expertise, and these are the ones it
is difficult to work with a lot of the time. I hear the anecdotes
on pricing. We have heard the point about base rate. Every time
base rate goes down, of the 1.1 million SMEs that we have below
£1 million turnover, virtually every one will see that base
rate reduction straight away. The pushback that says, "Yes,
but you have only just compensated it by increasing the margins,"
is not the case. We do price for rise. As a relative: against
the reduction that we have seen in base rate, the risk that we
have seen in margin has been a small percentage of that. Businesses
are getting the vast majority of the base rate reductions passed
down to them. I hear the anecdotes. The issues that we face, I
think, are the ones in those grey areas. We have not changed the
basis on which we look at credit. Our bar has stayed the same;
the businesses' bars have reduced. It is not in our interest as
banks not to support businesses. If there is one thing I would
like to see in two years' time, it would be still to have all
the businesses we have still operating very successfully. We are
there absolutely to support them. but we have to be honest and
we have to address the risks properly. I suspect that many of
the anecdotes that you see relate to those businesses where they
do not like the honest responses that we are trying to give.
Q79 Chairman: Can we see some statistics
to back up the claims you have made? You have made some very specific
numerical claims there, Mr Ibbetson. That would be helpful. We
will explore afterwards how we could take that forward.
Mr Ibbetson: Yes. Information
provided in confidence.