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

Examination of Witnesses (Questions 80-99)


16 DECEMBER 2008

  Q80  Mr Weir: Could you give us some indication of the percentage that have suffered an increase in the rate above base as a result of this? I would be very interested in that. There is certainly information coming back from the small businesses in my constituency, many of whom will not allow us to name them publicly for fear of what the banks might do, so we are in a vicious circle here, that they are suffering higher increases above base from the banks when they go back for further finance. These are not businesses, as far as I can see, in the struggling category. I am very interested and I would like to see some figures on this.

  Mr Ibbetson: We are required as part of the Government support to track the figures. We provide those things to the Bank of England, so certainly they are tracked. I would like to make one other point: the vast, vast majority of our SMEs are base-rate linked, our funding is LIBOR based, and there is a mismatch between base rate and LIBOR of about 130 bases points at the moment. We have committed that we will not pass that funding cost on to the SMEs. We take that ourselves, which ensures that the SMEs do get the full base rate reductions.

  Q81  Mr Clapham: I think you were in the previous session and you would have heard that question about the banks failing to understand SMEs. Given the situation, and in this particular crisis we see that perhaps the freedom of the business development chap who is down at the coal face is somewhat restricted, is it that which is causing the misunderstanding?

  Ms Peacock: We are in a slightly different position because we are a relatively small bank, Clydesdale and Yorkshire, rather than a very large bank. We operate a local model. 90% of our credit decisions are made by people in our business centres rather than anywhere at head office and that has not changed through the last six to nine months as conditions have deteriorated, so there is certainly no pressure, if you like, from upon high, from where we sit, to influence those local decisions. The other point I would make—and it maybe comes back to a point around supporting businesses and working closely with them—is that one of the things we track very closely is the number of businesses that are, if you like, talking with our people in a bit more of an intensive care mode, where that business might be entering difficulties. Currently, and the number has not changed—I cannot say that it will not change going forward—with about 75% of businesses that are, if you like, with our intensive care team, we manage to work with them to restore them back to health. That may change going forward. It has not changed thus far, and it has not changed for us over the last few years.

  Mr Maltby: We have a similar model to Clydesdale. 90% of our decisions are done locally in the same business environment as our customers sit, and we have a very experienced relationship management force of 1,400 people around the UK. On average, they have 21 years' experience with the bank, and their average age is 42. These are people who have spent their career working with small businesses in their local communities. I do think that we as an organisation do spend our time understanding small businesses and want to provide the support to them.

  Mr Cooper: We have similar demographics and so forth. One of the things we also do is that when we recruit new relationship managers we get customers involved in the recruitment process: "Would you be happy to work with this person?" As part of induction and ongoing training, our relationship managers spend at least one day a year with a business customer. I have an example of someone who was in a sandwich shop yesterday. He was in there buttering bread at 5.00 am and then cleaning all the equipment afterwards, ordering stock, paying the banking and so forth. We try to get as much experience in there as possible, but we also randomly sample 2,000 or 3,000 customers a month: "Tell us about your relationship manager." We take that feedback and we apply it. If someone needs training because they are not doing a good job, we learn from that. Our people are paid partly based on what their customers tell us about them.

  Q82  Mr Clapham: Obviously something has happened. There has been a change in the way in which you balance risk. How has that come about? When I look, for example, at how Barclays work, you work with the expert at the centre, who then has a relationship with the business relations manager on the ground, and between them they make the decision. Is it such because you have to be more cautious that the decision is more with the central expert than it is with the guy who is working with his businesses and knows about businesses? Is that the reason for the change?

  Mr Cooper: I would say it is not. We use a combination of top down from the centre and bottom up from the ground and we find that very useful. Perhaps I might give you an example. If you were an accountancy practice, for example, there would be a good relationship on the ground with the relationship manager who will see that business for what is happening on the ground, but that relationship manager may have little idea as to what accountancy practices across the country are experiencing and, therefore, that is why we have that combination of approach. We have also found that quite useful with the customer. With an accountancy practice, for example, in general terms accountants may be collecting their debtors in, say, every 30 days. Our customer on the ground may be on 50 days, in which case we are able to say to the customer, "Look, your peer group is collecting their cash quicker than you are. You might want to take some action to address that." We have found that very powerful.

  Mr Ibbetson: Over my time in SME banking, I have seen both models of lending directly at the frontline and more centralised lending. I have to say that I honestly do not think it matters. The analogy I always draw is that when an SME flicks the switch they want the light to go on. They are not too worried about what the wiring is behind, as long as the light goes on properly. The important thing is that we take the localness, we take the understanding of credit, we do all the right things, and then get the right answers. An advantage of having the centralised credit function is consistency. I think at the moment that is very important—it gives expertise and I think that is very important—but we must not lose sight of the localness and we work really hard on that. A challenge we have at the moment is making sure that we have our most experienced relationship managers sitting alongside those SMEs that are finding life most challenging.

  Q83  Mr Clapham: If the challenge then is to make the localness much more pertinent, how do we go about doing that?

  Mr Ibbetson: I think we do it quite well. We have 4,000 frontline relationship managers out there with the businesses. They liaise very tightly with their credit colleagues. I think we do it quite well. I have to say, speaking to the SMEs that I have been speaking to, I very, very rarely get a complaint to say that because the decisions are made centrally it is the wrong decision. The clever thing is flicking the switch and making the light come on. That is what we have to focus on. Different models have different dynamics, but it is addressing the SME and delivering to them what they want which is the important perspective.

  Q84  Chairman: Mr Cooper, just remind me, is your bank the one that wrote around to all its customers rather crudely telling them about the new terms and conditions? Did you, rather uniquely, not take the tailored approach that other banks took? Am I right in saying that?

  Mr Cooper: That has been misrepresented. We did not write to all our customers: we wrote to a small number changing their overdraft rates. Some went up, some went down.

  Q85  Mr Hoyle: How many is a small number.

  Mr Cooper: 15% went up, 15% also went down.

  Q86  Mr Hoyle: I am not being funny, but how many customers is 15%?

  Mr Cooper: It is round about 80,000 customers. A small number.

  Q87  Mr Hoyle: So it is 160,000 that you have sent letters to.

  Mr Cooper: Correct. Individual letters, most of which were followed up by a phone conversation, so it was not a standard circular—though it may have been presented as such.

  Q88  Chairman: Even so, it is quite a deterioration in the nature of the relationship that you would expect between a big bank and its customers to have. You did not cover yourself in glory with that episode.

  Mr Cooper: We spoke to most of the customers we could on a face-by-face basis. Most of our customers have actually responded fairly positively to that. Clearly those who received a reduction in rates were more positive than those others.

  Q89  Mr Hoyle: You keep telling us this: some go up, some go down. Did the majority go up or did the majority go down?

  Mr Cooper: The majority were unchanged.

  Q90  Mr Hoyle: I will try again. Did the majority go up or did the majority go down? Forget the unchanged because that is meaningless. What about did the majority go up or did the majority go down? I suspect the majority went up.

  Mr Cooper: That is not correct. The majority—

  Q91  Mr Hoyle: More people benefited.

  Mr Cooper: Correct.

  Q92  Mr Hoyle: Than went up?

  Mr Cooper: Correct.

  Mr Hoyle: That is fine.

  Q93  Chairman: We are giving you a very easy time, I am very conscious of that. You may not feel like it, but it feels like it from this side of the table. The trouble is, one of the reasons we are in this mess—one of them, it is not the only reason—is that the banks made so many mis-judgments in the past. How can we trust you to get the right answers now? You are saying you are doing all the right things now, but the history of the last few years is that you did not cover yourselves in glory really, did you?

  Mr Maltby: One of the things that Lloyds TSB particularly was criticised for in the most benign times was being prudent on its lending policy. We believed that we had a through-the-cycle lending policy, which is why we have not had to change those lending policies and we can support our customers in the good times and the bad times.

  Q94  Chairman: You are saying you did not make mistakes in the SME sector, you made them elsewhere.

  Mr Maltby: I am saying that as an organisation Lloyds TSB was a more prudent lender across its group, and particularly the bit that I represent in terms of the SME sector. We have a book that has a relatively low impairment level.

  Q95  Chairman: I must ask your three colleagues whether they were imprudent lenders or not in turn. Do you think you were an imprudent lender in the past in the SME sector?

  Mr Cooper: I would not say necessarily imprudent in terms of the SME sector. I think the industry as a whole has lessons to learn from being, I guess, to a degree, too liberal around providing access to finance. And Barclays has had a part to play in that. Equally I think so has the consumer had a part to play in that as well. I think it is important that everyone learns lessons from this and that there is no knee-jerk reaction from one extreme to another but finely balanced through that.

  Ms Peacock: Chairman, I would not say that Clydesdale or Yorkshire have been an imprudent lender either in the business or personal sector. We did not get involved in some of the activities on the fringe of the market and, as a result, whilst we have not been immune from the wider factors in the economy and in the global markets, we have been trading through this as a bank relatively well. It really is not in our interest to lend a penny to anybody who we do not believe can pay us back. That is a philosophy we have had through this. Where we have been accused, we have been accused of turning down opportunities rather than taking them on board.

  Mr Ibbetson: It is an interesting question. I am reflecting on it. I do not think we have been imprudent in any way. Within the Nat West brand and the Royal Bank brand we have led the market for about 20 or 30 years and we have been hugely supportive of this sector. I was just reflecting back to: Was it different last time when we were in a recession and heading for the recession as against this time? It is different this time. I do not think we could be accused of being imprudent, but it is different this time. There are a lot of other factors there this time. It is far more global this time. We have issues like energy prices that have been hugely volatile and far, far more important this time. Things are different this time. I think we need to do this time as we did last time, which is to support the businesses and understand the businesses and stay close to them. The important thing to recognise is that it is not in our interests as banks to see SMEs fail. We want to be there, as we get through this recession, supporting those same businesses, and that is good commercial business for us.

  Q96  Chairman: I have one last question on this and that leads me nicely to it. Do you make money on your SME books? Do you make money out of this? It sounds to me like a loss-leader exercise for you now from what you are telling us.

  Mr Ibbetson: With great caution because I had a similar debate with the Competition Commission when they were reviewing the profitability of the SME sector, so I address it with great caution. Over the cycle of course, this is business that we want to do, but it is a cycle and there are downs and there are ups. Over the cycle, it is good business, it is important business for us, it is important for our portfolio and, if it were not, it would not be a sector that we would continue supporting.

  Ms Peacock: Chairman, as a bank, we made about £250 million post-tax profit in the last financial year. We only made that from two sources. We made that profit from individuals and we made it from the SME sector, so clearly in the cycle both sectors are profitable for banks and I think that is actually a healthy position to be in. It is in no one's interests for banks to be unprofitable.

  Mr Maltby: We have had relationships with our small and medium businesses for some time and we do make a profit, as an organisation, over that period.

  Q97  Chairman: There is nothing wrong with making a profit. It is all wonderful, what you are doing, lending at base when the LIBOR is higher than base, but I am just trying to establish whether you want to be philanthropes at present or actually still running businesses.

  Mr Maltby: No, it is something that we feel very strongly, that this is a sector that is important to us, as an organisation, and we recognise it through our cycle as, we believe, the gap between base and LIBOR is not going to remain at the level that it is always going forward, and we believe that, as we have relationships with our customers for a period of time, actually we will make a good and strong profit over that period.

  Mr Cooper: I think a similar story. I guess the one thing I would add is that it is a competitive market and increasingly so. Two years ago, only one in 20 small business multi-sourced financial needs and today it is one in five, so small businesses are getting very adept at actually looking around for their best needs and services at a very competitive price.

  Q98  Miss Kirkbride: Just on that, I think, in a way, the panel that we have here today are representative of the small business sector in their banks, possibly with the exception of Clydesdale and Royal, who perhaps have wider responsibilities and perhaps have been more responsible in the past. If we had your chief executives here, then we could actually lay claim to the responsibility perhaps. NatWest/RBS's aggressive takeover policy has not helped its balance sheet at the moment with the tax-frame narrowing to 58%, so clearly across your banks as a whole, including Barclays who, after all, have been bailed out by the Middle East, you have been irresponsible, but your sector, the bit that you are actually in charge of, the small businesses, are now suffering to some extent because of the irresponsibility of those at the top in your banks, I think is probably a fairer judgment to take. Listening to you, I am with the Chairman in that the anecdotal experience we have both in my own postbag and in stuff we have had to the Committee does not entirely fit with the picture that you have told us of today, so we are all struggling to work out what the difference is. Is the difference the fact that you are now claiming that, "Well, the world has changed because of what has happened and we now have to price the risk, and that really what we see in our anecdotes is the price of risk and not the fact that we have changed our overall lending policies, but we are just applying our previous policies, but with more risk attached". Is that what it is?

  Mr Ibbetson: Frankly, I would agree with that, yes, I would agree with that.

  Ms Peacock: Well, I am here representing our bank and I think that a number of things are happening. The conditions are getting tougher and we have always priced the risk and we continue to price the risk. We are always trying to balance the needs of all of our customers and we fix risk being on the receiving end of additional cost-funding. Last year, we absorbed quite a bit of that and one has to hope, going forward, that the relationship between base and LIBOR, like one of the other banks here has said this morning, one has to hope that that relationship gets back more to normal, whatever "normal" is, situations.

  Q99  Miss Kirkbride: Just before you carry on, risk is likely to get worse, is it not, given what the predictions are for the economy, so is our predicament going to get worse for financing small businesses?

  Mr Maltby: One of the things which, I think, has become hopefully clear to the Committee is that, as banks, we are dependent upon the ongoing success of our small business customers. It is an important market for us all and it is something that we take a lot of time over. One of the things that we are doing to address the expectations that the economy is going to be challenging next year is that we are rolling out a series of 120 seminars, local seminars, so that each of our customers and prospective customers can come and meet with local experts, our own teams, to talk about how they can help themselves and how we can help them to prosper during these more challenging times, so I do not think it is just about the finance, but it is the point Steve made earlier, it is about what businesses can do themselves and how we can, along with other advisers, help them in identifying how they can change their business model and improve their prospects.

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