Memorandum from the Regional Finance Forum
(WM 30)
SUMMARY
1. Economic effect
— The economic effect has been severe in
the region particularly in the manufacturing supply chains for
vehicles and consumer goods. Other responses will be more detailed.
BANK LENDING
AND ACCESS
TO CREDIT
2. Historical Background
— Access to loan funds has been a problem
for SMEs for some time but has not been fully recognised by the
financial and economic establishment. The current situation is
a further deterioration of that problem, which needs new action,
but it will persist even when demand returns.
— The current UK based clearing banks have
over a period improved their profitability, by credit scoring,
reduced manning at local level, use of personal guarantees, and
arbitrary power, leaving a gap for community and development banking,
which is arguably greater than in other developed economies, which
have different institutions.
— Some responses emerged to help fill this
gap, including ICFC (later 3i), SFLG, regional equity funds, CDFI
and latterly the occasional loan fund. However the mainstream
system does not seem really equipped to deal with the banking
needs of all SMEs. Current economic conditions have started to
emphasise and exacerbate this situation.
3. Autumn 2008
— As banks became weaker and under pressure
there was much sudden, arbitrary and unprofessional action. West
Midland Regional Finance Forum (RFF) produced a fully-evidenced
report quickly for the Secretary of State that enabled him to
refute the innocence protestations nationally.
— West Midlands succeeded in making the
case for reopening the MG Rover Advantage Transition Bridge Fund
(ATBF) which could lend up to £250k (previously £500k).
— Regional CDFI funding was augmented by
over £2 million to provide access to high interest loans
under £50k.
4. Late 2008
Many national announcements were made about
financial support but most of it is of little relevance to SMEs.
The two key ones were:
— Potential deferment of PAYE, NI and VAT
bills as for MG Rover suppliers but now on a "blanket"
basis. This has been a lifeline to many companies.
— An Enterprise Finance Guarantee Scheme
(EFGS), which replaces the former SFLG with greater scope but
otherwise similar or worse conditions. Similar guarantee of 75%;
and instructions about use of normal banking criteria; but 10%
cap on claims in the event of default and discretion on use of
personal guarantees. The RFF discussed the position with all regional
participants before its announcement, and made strong, unaccepted,
cases for a larger guarantee of 90% (as now allowed by EU), no
cap and reduced personal guarantees (with a likely overall extra
cost nationally of less than £50 million).
5. First Quarter 2009
— EFGS starts to lend, but, even though
eligibility is at about the expected annual rate of £1.5
billion, currently, loans are about one quarter of that and average
below £100k. West Midlands is almost the highest region for
both loans and value compared with business population. This lending
rate will probably increase, as offers become reality.
— There is controversy over the use of
personal guarantees, with severe objections from individuals.
It appears against the principle of limited liability companies
and puts SME directors in a uniquely personal exposed position
in this current credit crunch.
— There is belief that a major reason for
the low total loans, besides the high personal guarantees sought,
is the current BERR (now the Department for Business, Innovation
and Skills) Guidelines to use normal bank criteria for acceptability,
with guarantees where there is risk in security. The real reason
why government guarantees are required is the high market risk,
which causes divergence in economic and financial objectives.
— ATBF is likely to use its current £10
million in about six months, in chunks of about £160k average,
at a loan of around £2,500k per job saved. Extremely good
value for public money as that is recouped from about three months
of individual activity.
— There is concern now that HM Treasury
(HMT) will discourage further use of this fund. That is clearly
not an acceptable position. ATBF needs to continue alongside EFGS.
They are fulfilling different purposes, with over 55% of ATBF
loans to manufacturers, as a result of the greater experience
and more skilled resources available to ATBF and their attitude
to lending.
6. Effectiveness of AWM and Business link
in enabling access to funds and banks
— RFF has been active for seven years to
advise AWM on priorities for both the development of financial
products and access to them and private sector funds—the
RFF has been particularly active recently in driving need for
loan fund.
— New partnerships have been developed
with banks in the presence of Regional Minister to encourage more
normal lending and use of new government products. These have
also enabled knowledgeable feedback to government before and after
the announcement of new products. However, Whitehall response
to this is weak.
7. Role of regional task force, other public
bodies and partnerships
New bodies have been established with all speed
to coordinate action and communication. RFF input has been provided
to all the regional discussions and emphasised the overwhelming
need for survival finance, without which investment and training
objectives cannot occur.
SUBMISSION DETAIL
1. Economic effect
Economic effect is covered in more detail by
other submissions but overall economic activity is down and unemployment
is up by more than other regions. This excessive effect is believed
to be due to the particular issues of manufacturing, where:
— Individual private consumers can and
do make choices on their purchases
— There are long supply chains, which are
susceptible to de-stocking
— The international nature is a special
case of this long supply chain with added problems of financial
uncertainty and potential to buy locally produced goods.
— Credit has dried up in many parts of
the supply chain as financial institutions become concerned at
medium term viability.
— Companies ensuring their own financial
survival, inevitably, having knock-on economic effects on others,
particularly affect long supply chains.
2. Bank lending and access to credit
2.1 Historical Loan gap
Access to credit and bank lending is not a new
problem for SMEs. It has been a concern of the Regional Finance
Forum since its institution in 2002. This "loan gap"
unlike the "equity gap" is a contentious issue but is
broadly driven by same issue of profit maximisation. High transaction
costs tend to spawn use of credit scoring rather than individual
assessment, Consequent categorisation excludes groups and specific
activity, only alleviated by "pawn broking" ie taking
charges on personal assets (overturning the basic concept of the
limited liability company). Banks are, understandably, much less
concerned about missing a good investment (and economic) opportunity
than failing with a bad debt This credit weakness is in contrast
to the sloppy credit availability to other sectors such as mortgages,
personal credit cards, private equity houses, commercial property,
large and even mid range coporates. It is generally unrecognised
by HM Treasury, central financial institutions and the public.
Arguably, the wish of many SMEs to remain very small and therefore
content with a weak availability of cash has also disguised the
problems for the ambitious.
2.2 Introduction of specialised loan instruments
There has been a continual pressure from growing
SMEs to improve access to the SFLGS where the government provides
some support for activities, which are potentially economically
sound but not financially supportable within tight credit worthiness
rules. It has been lending above £300 million for many years
with a net cost of about £50 million. Arguably, extremely
good value for public money but attacked by economists for its
intervention in our market economy.
In the last few years there has been a growth
in CDFIs, lending a max of £50k to more exclusive groups.
The West Midlands has also been trying to develop
publically supported loan funds, similar to the ATBF set up at
the time of the MGR problem. It would lend at EU acceptable high
rates, higher than that for normal bank lending and done by experienced
lenders with discretion. A review of the MG Rover initiative demonstrated
that most of the money will be returned to the lenders and many
jobs that otherwise would have lost have been saved. A marvellously
effective use of public money. (An independent assessment is available)
This fundamentally demonstrates the point about economic investment
opportunities being missed by the clearing banks, which indeed
support this AWM initiative.
2.3 Credit impact autumn 2008
At the time of the banking failure, some banks
almost seemed to panic with SME banking facilities. This took
the forms of arbitrarily reducing overdrafts, upping rates, introducing
new charges etc many with immediate effect. It was the subject
of a quick survey by RFF in November 208 and a paper produced
for the Secretary of State. There was evidence of this action
from virtually all banks across the region. The banks denied it
but the evidence from intermediaries was absolutely clear. Many
were acting with total disregard for accepted banking practice,
the consequences were severe and we know of many insolvencies,
judged unnecessary by experienced intermediaries
2.4 Late 2008
After regional and national protests this arbitrary
banking action seems to have reduced, or maybe we just got used
to it. However banking support was still weak. There were claims
from banks that they were lending as much but we believe that
much of their increase was taking up opportunities for secure
lending where some of the withdrawing foreign owed banks had a
large market share. Other problems started to emerge of withdrawal
of invoice discounting, credit insurance and banking from various
suffering industries such as car manufacturing, retail and construction.
Regional loan fund ATBF with £5 million
available (later £10 million) re-opened in the West Midlands
and received immediate demand. It has satisfied around one third
of the serious requests.
Nationally a number of initiatives were announced
but the only ones with a real direct influence on the SME market
were the excellent Tax deferment on PAYE, NI and VAT, now over
£1 billion, and what was later called the Enterprise Finance
Guarantee Scheme (EFGS)
EFGS Structure was very similar to the SFLG,
which it was supposed to replace but:
— Open to larger businesses and loans up
to £1m compared with a previous limit of £250k.
— Guarantee remained at 75% in spite of
the fact that the EU now allowed 90% since late 2008. (Note the
difference in cost to the government of this change would have
been about £200 million in guarantee and £20 million
in maximum cost and for such a small amount was a potentially
excellent initiative hampered)
— An overall cap on claims of around 10%
was introduced which did not exist previously
— Banks were allowed to take discretion
on personal guarantees, rather than instructed to take them if
available. This seemed to be an improvement but in practice many
banks seem to have retreated to previous practice.
— Banks are guided to use normal lending
criteria but use guarantee if security not available, or other
circumstances, ie, broadly it was to be used as a support for
security risk rather than market risk, which is the phenomenon
of this current economic climate. A debate with BERR has produced
an email, which agree it can be used for such risk but it is not
in the explicit guidelines.
2.5 Quarter 1 2009.
The evidence of lending to businesses is still
confused. The EGS is claimed to be succeeding with the amount
of eligible applications being quoted, which is about the predicted
rate of around £30 million a week. However the amount lent
is currently around a quarter of this with some expected delay
in actually delivering cash to companies. Will it catch up? The
current lending rate is about the same as the old SFLG scheme
and the average loan less than £100k.
2.5.2 Personal Guarantees
Around 40% of the loans offered seem to require
the SME directors to heavily guarantee them. This is enough to
cause headlines, but actually is a continuation of what banks
have been doing for some time as a demonstration of commitment,
a fallback security and a substitute for considered assessment.
However the SME community is now much more annoyed, as they appear
to be the only members of society being called upon to mix personal
assets and business life (not bankers, public companies, regulators,
or bonus recipients) when they have not been the cause of the
credit problems and they also believed that government was going
to share some of the market risk. Who wants to be an entrepreneur?
Society is now also tending to ask questions.
2.5.3 Industry wide exclusions and credit
restrictions?
It is quite clear that some banking takes a "blanket"
sectoral negative approach in lending criteria, of which automotive
is key in the West Midlands region but other supply chains are
also being affected such as construction and consumer goods.
Credit insurance and invoice discounting is also
difficult in these chains for component manufacturers and exporters.
Some help from Government. as in other countries.
in being a further insurer such as for ECGD, or the extension
of guarantees, would be very useful.
ATBF is still proving very active. The pattern
of lending is changing a little with more consideration in the
sectors which mainstream banking is avoiding but where ATBF can
try and take a more intelligent and a balanced view. It has now
approved in total £8 million loans with £6 million drawn—over
30% for Automotive and over 55% for manufacturing in total. The
average lending per job saved is around £2,500—very
good value for money, as that is about what a business generates
for government coffers in three months existence in current circumstances.
Committed loans and appraisals in progress nowexceed the £10
million available. The case is being made for further investment
in the fund but it is believed that HMT will resist in spite of
the evidence that ATBF is a major weapon in the West Midlands
armoury, supplementing rather the replacing the EFGS activity.
Many companies are trying to survive by cutting
their labour force, or reduced working or both. In some cases
this is involving highly skilled workers who may not be replaceable
in any upturn. We believe that some form of support for retention
of skilled workers would be much more effective than training
subsidies for potential future theoretical jobs. European mainland
has of course done both.
The demand continues to be high in the local
CDFIs, which operate in every sub region of the West Midlands
lending up to £50k. Currently the support has come from the
AWM but there is scope for support from local authorities matched
by EU money, as yet unrealised. Central government could also
provide additional support to RDAs which could by matched with
EU money.
RFF believes that the present insolvency regime
requires review, as some of the catastrophic failures that we
are witnessing are not in the best interests of the national economy.
The MG Rover Task Force made such a recommendation but it was
not accepted.
In the meantime some minor adjustments particularly
to the process for CVAs would be welcome.
3. Effectiveness of AWM and Business Link
in helping to gain access to funds
3.1 Historically
The RFF has been an advisory body to AWM, for
seven years, to ensure potentially viable SMEs have access to
suitable funding. It has helped to create an escalator of finance
availability up to £2 million, including grants, public supported
venture capital and loan funds covering various risk levels and
available amounts. It has been trying to create a regional development
bank for SMEs "brick by brick". It has also supported
other market initiatives such as Business Angels and Investbx,
joining sources and needs of funding. However it fundamentally
recognises that private sector financing is far more important
than public intervention. Private sector providers and intermediaries
such as VCs, bankers, accountants etc are fully involved in the
RFF. For five years, breakfast meetings have brought together
representatives from all the banks, with lending practices and
the SFLG under constant discussion.
3.2 Currently
The RFF has driven the reinstitution of ATBF
and submitted many documents to ministers regarding requirements
for national financing initiatives. In particular it provided
a comprehensive document over a weekend to support the Secretary
of State in his meeting with national bankers regarding unacceptable
and arbitrary behaviour of banks, and it has produced monthly
checklists of actions for the Regional meetings in London. It
has recommended many actions to AWM and Business Link regarding
the business support associated with finance.
The RFF has also been particularly active with
the banks. The RFF chair, with the Regional Minister, has lead
meetings with representative of all the major banks and business
organisations. The third such meeting is due next week. These
have discussed potential and actual national initiatives, such
as EFGS, but also the local performance where West Midlands is
now highest in lending related to company population. There is
now an established regional appeal mechanism in all the major
banks whereby companies or their representatives can pursue banking
issues to higher level with Business Link support. In addition
the executive staff and chair have held individual meetings with
various banks. Civil servants and politicians have been briefed
with suggestions for national action and reports of agreed region
action. However the positive response from Whitehall to this intense
action has been limited.
Business Link has a Credit Crunch hot line and
has been a key route for advice but much of that distribution
has been via local banks, ATBF, appropriate CDFIs, AWM, or skilled
intermediaries. They of course have also been able to provide
traditional but expanded Business support. Accelerate brand has
been reintroduced via MAS for Automotive contact.
4. The role of West Midland task force, other
public agencies and regional partnerships.
The Chair of the RFF is a member of most of
the regional groups established to help the Crunch and has thus
been able to emphasise the importance of survival finance for
business. Without that, all objectives, such as training, investment
in R&D and green issues, disappears. An obvious point but
not apparent from much of the public sector and indeed press discussion.
A further objective has been to demonstrate
that the existence of much of private industry, particularly manufacturing
OEMs, can generate up to 25% of its turnover for the public coffers.
Thus the public exchequer can benefit much more than owners and
we all need to take some responsibility for its survival, in all
our interests.
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