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

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 12 months.

  Q62  Mr Hoyle: So they have not gained anything?

  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 marginally—depending 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 about—and I have to say we hear a lot about tit but never get a lot of proof—is 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-year—and 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 reduction—in fact we have seen an increase—in 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 you?

  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 debt.

  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 risk—and 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, yes.

  Q76  Mr Hoyle: So it is a myth.

  Mr Cooper: How risk is priced is based on, one, the industry that business is in—so 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 industry—and we have no blanket policies in place for any sector—there 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 under?

  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 anecdotes—I know they are anecdotes—about 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 business—I have recently been invited back into banking having spent five years at the coal face as a director of businesses—so 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.

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