2 The state of the SME lending market
Current market conditions
7. Data from the Bank of England is a key source
of information for understanding the state of the SME lending
market. The Bank of England has published data on business lending
disaggregated to the SME level from April 2011 onward. In previous
years, the Bank published only aggregate business lending data.
This measure, which is still published, excludes unincorporated
businesses, such as sole traders, which make up a large proportion
of SMEs.[8]
Chart 1: Lending to UK businesses
Source: Trends in Lending July 2014, Bank of England,
July 2014
8. There are two principal measures of lending to
SMEs—gross lending and net lending. The Bank of England's
definition of gross lending to SMEs measures new loans, advances
and finance leases granted to non-financial SMEs within a period.
Its definition of net lending calculates gross lending minus loan
repayments, and is a measure of the change in the total stock
of lending to SMEs.[9]
9. During the 2008/2009 financial crisis, lending
to businesses appeared to fall significantly. The April 2009 Bank
of England Trends in Lending report said that "growth
in the stock of lending to UK businesses slowed markedly during
2008, reflecting reduced flows of net lending by foreign as well
as domestic lenders".[10]
Over the period 2009 to 2011, this negative trend appeared to
worsen. The October 2011 Trends in Lending said:
The BIS data over recent months have indicated
that growth rates of the stock of lending to SMEs are more negative
than the position six months ago. The annual growth rate stood
at -5% in August 2011.
Data published by the British Bankers' Association
(BBA) on the stock of lending to small businesses, defined as
turnover of up to £1 million, and which are available up
to June 2011, have shown negative lending growth rates for this
sector, with the annual rate standing at -10% in June 2011.[11]
Chart 2: Lending to small and medium-sized enterprises
Source: Trends in Lending October 2011, Bank of
England, October 2011
10. More recent data suggests that this post crisis
trend has been gradually reversing. On gross lending, the Bank
of England's data shows improvement at a gradual rate from early
2012, with the first nine months of 2014 showing 32 per cent higher
gross lending than the comparable period in 2012. On net lending,
the Bank's data shows that there has been a net outflow of total
credit extended to SMEs for 34 months out of 45 since April 2011,
with SME net lending outflows—excluding overdrafts—of
£12.9 billion in total. However, over this period, the rate
of contraction of the stock of lending has been falling. Average
negative net lending during the nine months to September 2014
was £203 million, compared to £249 million and £540
million in the nine months to September 2013 and September 2012
respectively.[12] Prior
to April 2011, the Bank's data on lending to non-financial businesses
shows a gradual reduction in the size of negative net lending
flows from a trough in late 2009.[13]
11. Interpreting the Bank of England's net lending
figures, Alan Clarke, Head of UK and Eurozone Economics, Scotiabank,
said that negative net lending largely reflected higher repayments
and not a fall in new lending:
Net investment has been going down, but one thing
the Bank of England stressed in their bank lending survey has
been lots of firms repaying loans, so that has adversely affected
those data. It looks like there is less new lending. There has
been new lending; it is just a lot of the old lending has been
repaid. That might be telling you something about credit conditions
because if firms have the spare cash to repay those loans they
must be confident that if they need credit further down the road
they will be able to get it.[14]
12. Witnesses to the Committee broadly agreed that
some improvement in lending conditions for SMEs had occurred since
the crisis. Matthew Fell, Director of Competitive Markets at the
Confederation of British Industry (CBI), said that lending had
started from a "very low base" since the crisis, but
that there had been some improvement recently:[15]
I do not think the situation is going to continue
for the next five years as it has for the last five. I think quite
a lot has changed since then. I do think particularly in the straightforward
bank lending sector, we are seeing something emerge that we at
the CBI have described as a new normal. Regulatory reform, particularly
additional capital structural reform hitting banks, the banks
themselves having to restructure their balance sheets and, frankly,
a more realistic pricing of risk has changed the rules of the
game. More encouragingly, I think banks' balance sheets are in
better shape than they were five years ago, so their appetite
for lending is on the increase. We have seen quite a lot of exciting
developments happen to increase choice and competition, both in
the banking sector and with alternative forms of finance, which
we can come on to. I also think that even within the last six
or nine months on the demand side of the equation, which has been
as much a problem in previous years, small and medium-sized firms'
appetite for growth and investment is returning and they are now
more actively seeking finance than they were at the height of
the crisis.[16]
Priyen Patel, who was at the time Senior Policy Advisor
at the Federation of Small Businesses (FSB), said:
In terms of what we are saying at the FSB, there
is steady, positive progress. We have seen, over the course of
a year or so, a slight reduction of spread that small businesses
are getting on their credit, whether that be loans, overdrafts,
credit cards, whatever they happen to be. You can put that down
to a generally slightly more upbeat economy, so the general stock
of credit small businesses around the country is slightly higher,
or we could put it down to FLS, the Funding for Lending Scheme.[17]
Kevin Daly, Senior Economist at Goldman Sachs, cautioned
however that there was substantial room for progress. He told
the Committee:
The availability of credit to SMEs is improving.
I think it has an awful long way to improve. It is coming from
a very low base. The SMEs were really starved of credit availability.
As I say, the good news is that it is getting better but I think
there is a long way to go […][18]
13. Written evidence also suggested that limited
progress had been made. Survey data from the EEF, a manufacturers'
industry group, suggests that lending conditions have been gradually
improving. In its submission to the Committee, the EEF said that
"there appears to have been some stabilisation and then gradual
improvement in SME credit conditions" from an "extremely
challenging 2008/09 period". [19]
However, EEF also wrote:
While we have noted that finance has been flowing
a bit more freely to SMEs, there remains a large minority of companies
(across all sectors) that are not successful in securing funding.
It seems the post crisis leap in rejection rates-high compared
with other European countries-remains elevated.[20]
14. Referring to information collected within the
SME Finance Monitor, the Association of Chartered Certified
Accountants (ACCA) said that there appeared to have been some
improvement in credit availability:
The percentage of UK SMEs reporting access to
finance as a significant barrier to pursuing their business objectives
(8%) was lower in Q4 2013 than it has ever been since the independent
SME Finance Monitor surveys began in early 2011. This figure only
rises to about 12% after excluding SMEs disengaged from the banking
sector, and has been falling across size-bands in any case. This
is part of a medium-term trend suggesting an easing of the credit
crunch that followed the last recession.[21]
15. Trade bodies told the Committee that access to
finance was no longer the biggest concern for businesses. Mr Fell
of the CBI said:
I do not think access to finance is the biggest
problem or challenge facing small businesses. I think that remains
due to uncertainties on the economic outlook and being confident
enough on the demand side for their businesses. I think that is
the single biggest problem.[22]
The CBI wrote:
Small and medium-sized businesses report that
access to finance is crucial to their businesses success. However,
we have seen a decrease in the importance of access to finance
for our small and medium sized business members. In 2012 small
and medium-sized businesses were significantly more likely to
report that 'availability of finance' was a key success factor
for achieving the company's business objectives than large employers.
A survey of our members last year showed that although the availability
of finance was still a significant challenge to growing the business,
members reported that difficulties recruiting skilled staff is
now their biggest challenge.[23]
Underserved segments of the market
16. Despite improvements in overall credit availability,
evidence to the Committee suggested that some sorts of firms may
find it harder to access credit than others. In particular, evidence
from the Association of Chartered Certified Accountants noted
that "fast growing, intangible-capital-intensive businesses"
were credit rationed.[24]
Mr Fell also told the Committee that firms with more intangible
assets found it harder to get credit from banks:
That is a problem that has existed for them before
2008, before the credit crunch hit and has clearly been exacerbated
by it. Our sense is that banks historically have been much more
confident lending against businesses with physical assets to secure
that lending against than they are for intangible assets such
as the creative industries, and we do think that is an area that
should continue to be looked at and explored. There is scope for
improvement there.[25]
The Big Innovation Centre agreed, explaining that
"traditional banking business models" failed to "accurately
value […] intangible assets (such as computerised information,
innovative and intellectual property, etc.)".[26]
The CBI wrote:
[…] requirements for businesses to have
fixed collateral upon which to secure finance has a disproportionate
impact on businesses not backed by traditional assets. These businesses
do have a range of intangible assets such as patents, a brand,
a website which, if valued effectively could be used to secure
finance against. However, intangible assets are difficult to value
and hard to use as collateral which results in many businesses
being unable to secure finance.[27]
The ACCA said that "banks' attitude towards
intangibles may not be optimal but it is rational" and that
"default rates among intangibles intensive SMEs are higher
than those among other SMEs". It also said that "fast-growing,
innovative, intangible-capital intensive businesses were already
credit rationed in the heady days of 2006-7, not only in the UK
but throughout Europe".[28]
17. Evidence also suggested that new firms had difficulty
accessing finance. Respublica, a think tank, wrote that "it
is new business that struggle the most" to access credit.[29]
The ACCA said that "evidence from the SME Finance Monitor
suggests that, while almost all applications for renewed loan
and overdraft facilities are successful, only a minority of first-ever
applications are approved".[30]
Indeed, the results of the SME Finance Monitor show that only
56 per cent of first time loan applicants ended their lending
process with a facility, compared to 66 per cent for those with
previous loans seeking a new facility, and 94 per cent for loan
renewals.[31] The ACCA
explained:
[…] approval rates increase as the applicant
develops a track record in business, becomes better known to the
bank and more tried-and-tested as a user of the specific facility.
This is partly because repeat borrowers are larger and more established,
but also partly because the banks generate and use proprietary
information, both financial and nonfinancial, in order to assess
the creditworthiness of SMEs.[32]
The ACCA also believed that this reluctance to provide
credit was "mostly due to structural problems which predated
the last recession".[33]
EQUITY FINANCE
18. Debt finance provided by banks may not always
be the most appropriate source of finance for SMEs. The Committee
received evidence suggesting that, for some SMEs, equity finance
was a more suitable form of funding than debt. Written evidence
from RBS suggested that this was particularly true for start-up
businesses:
Many SMEs seeking loan finance are in fact either
overleveraged already or if not they do not have sufficient cashflow
to service the debt. On the latter this is most notable for young
start-up businesses. In reality in both situations, equity finance
is often more suitable than debt.[34]
Evidence from the CBI agreed, stating that "there
is a greater role for equity finance to provide patient finance
to small and medium-sized businesses, but it is extremely under-used
in the UK due to barriers on both the demand and supply side".[35]
19. The RBS Independent Lending Review—an RBS
funded review into its own business lending performance—blamed
the UK's over-reliance on debt compared to equity on the poor
lending standards that existed before the crisis:
Pre-crisis practices created unrealistic expectations
amongst SMEs: In the run up to the financial crisis, the distinction
between the need for equity versus debt financing became blurred.
Banks lent without sufficient discipline, and SMEs were able to
borrow cheaply and easily instead of raising equity. This was
particularly true for lending to the Commercial Real Estate sector,
and for lending secured by property.[36]
GOVERNMENT SCHEMES
20. There have been a large number of government
schemes aimed at helping businesses who are seeking finance. These
have included the Funding for Lending Scheme (FLS), Enterprise
Finance Guarantee (EFG), Business Finance Partnership (BFP), Start-Up
Loans scheme, Seed Enterprise Investment Scheme (SEIS), Enterprise
Investment Scheme (EIS), Venture Capital Trust Scheme (VCT), Business
Angel Co-Investment Fund, Enterprise Capital Fund (ECF) Programme,
UK Innovation Investment Fund (UKIIF), Regional Growth Fund (RGF)
and Growing Places Fund.[37]
21. Some government schemes directly target perceived
gaps in SME debt finance markets. For example, the Government
states that the aim of the EFG scheme is to "facilitate lending
to viable businesses that have been turned down for a normal commercial
loan due to a lack of security or a proven track record".[38]
Some government schemes also target the provision of equity financing
for firms. For example, the SEIS is designed to "help small,
early-stage companies to raise equity finance through encouraging
individual investors to purchase new shares in qualifying companies".[39]
22. When asked about the number of SMEs who were
fully aware of the large number of Government schemes available
to support them, Peter Hollis, owner of the accountancy firm Hollis
and Co, told the Committee that awareness was probably "minimal".[40]
Chris Lane, partner at accountancy firm Kingston Smith, said that
while he was aware of some schemes such as the "the Business
Growth Fund and the investment fund for equity investment",
he was not aware of the large number of schemes available.[41]
23. The Government itself has acknowledged that awareness
of schemes has been low. A 2013 study funded by BIS said:
Overall, only 15 per cent of SMEs that had used
finance in the last 3 years claimed they were aware of Government
finance schemes. However, of these, the majority were not able
to say which financial products were covered by the schemes. When
prompted with the name of a specific scheme, the majority of SMEs
were still not aware of the existence of the finance scheme mentioned.[42]
24. The Committee also found evidence to suggest
an over-optimistic perception of schemes by businesses, referred
to by the British Chambers of Commerce (BCC) as a "capability
expectations gap":
Businesses expected swift availability, clear
information, and efficient processes—but the reality on
the ground has been far different, with coal-face bank personnel
often unable or unwilling to facilitate access to what is a bewildering
array of products.[43]
The BCC also identified a number of potential causes
for the inability of government schemes to deliver what businesses
expected:
Inexperienced relationship managers and credit
officers are still often incapable of explaining how state-backed
products work, or how local businesses can access them. It is
an open question whether this is down to incomplete information,
difficulties in rolling out training, or the fact that banks'
incentive structures are geared to the sale of their own products,
rather than helping companies to access government support.[44]
25. However, some government schemes were viewed
positively by witnesses. Mr Hollis described the Enterprise Finance
Guarantee Scheme as having worked "quite well" and said
that "people are aware of it and it has been around a long
time".[45] Mr Lane
was extremely positive about the Enterprise Investment Schemes:
The [Enterprise Investment Scheme] and [Seed
Enterprise Investment Scheme] are fantastic, and I see a lot more
activity in those areas, so I think where the banks have withdrawn
and there is sort of a funding gap, these other schemes have helped
to fill that. I think they have been very successful and certainly
SEIS is going from strength to strength.[46]
26. Some of the Government's SME finance assistance
schemes—for example the Enterprise Finance Guarantee Scheme—are
now operated through the British Business Bank.[47]
Keith Morgan, CEO of the British Business Bank, said that one
of the Bank's objectives was to improve awareness of government
support schemes:
We have done plenty of surveying and speaking
with small businesses, and it is very clear that there is a job
to do to increase the awareness and understanding of offers in
the marketplace. One area that we are particularly focused on—I
think it was referenced by the BBA—is that we think there
is a role to bring together much more consistency in the marketplace.
When it comes to companies knowing what is on
offer, we brought together the [Institute of Chartered Accountants
in England and Wales, the Confederation of British Industry, the
Institute of Directors, the British Bankers' Association, the
Federation of Small Businesses], and a clutch of other people
to put out one shorthand document—one reference in layman's
terms—about what is available in terms of options in the
marketplace. That is something we have been pushing very strongly
since we launched it in July and it is one of our priorities for
the year.[48]
27. Official and industry data, as well as evidence
presented to the Committee, show that the overall availability
of credit has improved since the low point of the financial crisis.
While the cyclical downturn in lending may not yet have been fully
reversed, anecdotal evidence suggests that many businesses are
finding it less difficult to obtain credit. This is welcome.
28. However, SMEs are highly heterogeneous. The
credit crunch may have abated, but long standing structural problems
in SME finance dating from before the financial crisis remain.
In particular, firms seeking finance for the first time and firms
based heavily on intangible assets appear to find it much harder
to obtain access to credit than others. This may in part be because
new firms lack a track record on which lenders can assess their
credit risk. It may also result from the risks that arise from
the use of intangible assets as collateral for loans. In such
cases, the unwillingness of a bank to lend may reflect greater
risk within the business which is seeking credit. It
may also be due to a bank's reassessment of risk following the
crash.
29. There are sound economic foundations to government
schemes that aim to address gaps in the availability of funding
for SMEs. There are a large number of different schemes and funds,
each with their own, specialised rules. It is noteworthy that,
in evidence to the Committee, business advisors themselves appeared
unaware of some of the schemes available—it will be all
the harder for very small firms to be aware of the schemes that
may apply to them. It is therefore not surprising that many businesses
are unaware of the targeted funding support available to them,
or have difficulty navigating what is available. The schemes may
be reaching only a proportion of the businesses that they are
designed to help. The British Business Bank has been given the
role of increasing businesses' awareness of government schemes.
The Government should
also review the schemes and their purposes, and with a view to
simplifying both the schemes and their availability, as a matter
of urgency.
Importance of perceptions
30. On the demand side, expectations of the availability
of credit may be an important factor in determining the SMEs'
willingness to approach banks for credit. Stuart Fraser of Warwick
Business School wrote in Back to borrowing? Perspectives on
the 'arc of discouragement' that SMEs may be discouraged from
applying for finance in two key ways:
· Borrowers may be indirectly discouraged—this
is where they believe their bank is reluctant to lend despite
having no discussion with the bank.
· Borrowers may be directly discouraged—this
is where the borrower has become discouraged owing to direct interaction
with their bank.[49]
31. In reference to RBS, Sir Andrew Large, former
Deputy Governor of the Bank of England, wrote in the RBS Independent
Lending review that perceptions of lending affected demand for
credit:
[…] any perception that the bank is not
lending money, but rather withdrawing it, has the potential to
discourage some customers from approaching RBS to discuss new
borrowing needs, thus reducing current and future demand for borrowing.[50]
The EEF expressed a similar viewpoint in its submission
to the Committee:
These are companies that have a financing requirement
but not an appetite to borrow. The factors behind discouragement
can either stem from a belief that applications will be unsuccessful;
higher borrowing costs or restrictive terms and conditions; or
previous experiences with finance providers.[51]
Kingston Smith LLP also identified similar views
among its own SME clients, and told the Committee that "many
SMEs perceive bank lending policies to be more negative than they
actually are and so do not seek finance". In particular,
its submission notes that "SMEs' negative perception of banks
is influenced by the media".[52]
However, the ACCA found that a bank's own behaviour was more important
than external factors such as word-of-mouth or the media:
SMEs have typically underestimated their chances
of getting finance from a bank by 7-16 percentage points. This
expectation gap has been closing gradually since 2011, as discouraged
borrowers are becoming more realistic (and thus more optimistic).
Surprisingly, low expectations tend to be driven mostly by a poor
relationship with the SMEs' bank—not media coverage or word-of-mouth.[53]
32. Qualitative data from a number of surveys also
underlines the importance of customers' perceptions for credit
demand. According to a Forum of Private Business (FPB) survey
from 2013, "95% of [its] members felt the perception that
banks were lending was important". According to an FPB survey
from 2012, the largest reason for low customer demand was discouragement.[54]
The FPB said:
[…] 61% reported that they or other small
businesses within their network had received signals from banks
that they were not prepared to lend to businesses such as theirs.[55]
33. In Back to borrowing? Perspectives on the
'arc of discouragement', Stuart Fraser suggests that
a significant number of discouraged borrowers exist:
While the number varies over the economic cycle,
estimates indicate there are approximately 173,000 [discouraged
borrowers (DB)] the majority of which, around 115,000, are indirectly
discouraged. Although the number of DBs corresponds to less than
4% of the 4.8m SME population, and compares to 3.6m (75%) 'happy
non seekers' (businesses which say they have no need for external
finance), it is about the same as the number of businesses denied
bank finance.[56]
COMMUNICATIONS FROM BANKS
34. In some cases, SME discouragement may be due
to a mismatch between banks' communications and customer experiences.
Sir Andrew said that "a perception has arisen among some
SME customers that RBS is unwilling to lend" and that 30%
of SMEs disagreed with the statement that RBS was "open for
lending".[57] However,
Sir Andrew found that, in the case of RBS, there existed a "mismatch
between the expectations of [RBS's] external stakeholders and
the bank's own communications".[58]
In particular, he concluded that RBS's approach to communicating
with the market was focused on defending itself against its critics,
rather than creating realistic expectations in potential consumers:
The mismatch between the expectations of its
external stakeholders and the bank's own communications are themselves
a problem for RBS. RBS shared with the Review many details of
the communications it has had with market stakeholders. It is
clear from these documents that RBS has frequently sought to explain
its point of view in response to external criticisms. Yet it is
clear that it has not actively addressed mismatches in expectations.
Beyond the reporting of lending results […], a good example
of this relates to approval rates. While RBS has focused on the
fact that it approves at least 80% of all the applications it
receives, it has failed to acknowledge the fact that many customers
who approach it to discuss financing are "screened out"
of the process before they submit a formal application.[59]
As a result of such a communications approach, Sir
Andrew notes that "market stakeholders such as the Government
and Business Associations have been left confused by the divergence
between what they hear from customers and what they hear from
the bank".[60] Sir
Andrew also raised the problem of a lack of publicly available
data on RBS's lending performance:
There is no comprehensive, publicly accessible
data set on which to form a view about RBS's performance: instead,
the perspectives of market stakeholders are shaped by a combination
of personal experience, incomplete facts and anecdote.[61]
35. Whilst Sir Andrew's report focuses only on perceptions
of RBS, such a mismatch of expectations may extend beyond just
one bank. The Institute of Chartered Accountants of Scotland (ICAS)
commented on banking sector communications regarding lending performance,
emphasising the importance of transparency and trust:
We believe that trust will also be built if banks
are encouraged by Government to be more transparent in their reporting
of lending to SMEs. Gross and net lending statistics present only
an aggregate and sometimes distorted picture. Banks should publish
statistics on the number of applications from SMEs, and specifically
on sub-groups within this broad range, and the success rates of
these applications. We would also like the banks to explain better
how they are improving behaviour within their operations by, for
example, increasing the numbers of local relationship managers
targeting SMEs and explain the impact of these improvements and
how it is meeting the objective of greater levels of SME lending.[62]
PUBLIC DEBATE ON THE CAUSES OF RESTRICTED
CREDIT TO BUSINESSES
36. The divergence between the public's and banks'
perceptions of credit availability may also have stemmed from
public debate on the topic. Since the crisis, there has been much
evidence of a disagreement between banks and the public about
the availability of credit to businesses. Mr Patel, then senior
policy advisor at the FSB, characterised part of the dispute as
a disagreement over whether subdued lending figures were due to
credit restriction from banks or low demand from businesses:
I think there was, and there probably still is,
a debate, and I am putting it very simply, from maybe the business
side, the press and maybe parliamentarians, saying businesses
cannot get money, and on the other side, once again simplifying,
banks and financial institutions saying the demand is not quite
there.[63]
37. Evidence of this debate can be seen recently
in public discourse on the Funding for Lending Scheme (FLS) and
its effect on SME finance. The banking industry has been broadly
positive about the performance of the FLS. In May 2014, the BBA
said that "Funding for Lending has had a positive impact
on both liquidity and loan pricing since it was first introduced
in 2012".[64] In
August 2014, the BBA argued that FLS data showed "a pickup
in borrowing by small and medium sized businesses" and said
that it was "encouraging to see that the Funding for Lending
Scheme is continuing to be used to help businesses".[65]
However, many business groups' statements about the performance
of the FLS have been negative. In August 2014, the Federation
of Small Businesses said that small businesses were "still
struggling to access finance"[66],
whilst the Forum of Private Business described FLS figures as
"disappointing".[67]
Media coverage has also focused on negative net lending figures
published within the FLS data.[68]
Availability of data
38. Data on bank lending provides a means of assessing
credit market conditions. Until recently, the Bank of England's
business lending data was only available on an aggregated basis.
The Bank publishes a number of datasets in this regard. These
are:
· Private Non-Financial Corporations
(PNFC) M4Lx—sterling loans to private non-financial
corporations. Data is available quarterly from March 1963 and
monthly from September 1997, and excludes unincorporated businesses.
· Sterling loans to PNFCs—sterling
loans to private non-financial corporations. Excludes securities
and commercial paper. Data is available quarterly from June 1990
and monthly from September 1997, and excludes unincorporated businesses.
· All currency loans to PNFCs—sterling
and foreign currency loans to private non-financial corporations.
Excludes securities and commercial paper. Data is available monthly
from January 1998, and excludes unincorporated businesses.
· Loans to non-financial businesses by
industry—sterling and foreign currency loans to non-financial
businesses split by industrial sector. Excludes securities, commercial
paper and some other components (including acceptances and bills).
Data is available quarterly from December 1997 and monthly from
June 2009.[69]
39. As a result of the financial crisis, the Bank
of England encountered new requirements for data that it did not
collect. This was particularly true for SME lending, about which
the Bank had been collecting only limited information. The Bank
wrote in 2012:
User demand for detailed data on bank and building
society lending to the UK private sector came into sharper focus
following the deterioration in banking conditions in late 2008,
and this remains the case. There is particular interest in credit
to businesses, including small and medium-sized enterprises (SMEs).
The priorities for enhanced data in late 2008
were higher frequency (twice monthly, for a limited duration)
and a broader range of private sector credit variables, which
were to be sourced from a limited survey of the largest lending
institutions. Data definitions were allowed to be relatively flexible,
in order to accommodate what individual reporters could reliably
commit to, at short notice. At the same time, the Department for
Business, Innovation and Skills (BIS) agreed with a number of
major UK lenders to collect detailed data on bank lending to SMEs
in order to inform the debate on lending to this segment of the
economy.[70]
40. The Bank of England described this new data in
its first Trends in Lending from April 2009:
The new collection—referred to as 'Lending
Panel data'—covers the major UK lenders: Banco Santander,
Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank
of Scotland. Together they accounted for around 65% of the stock
of lending to businesses, 50% of the stock of consumer credit,
and 70% of the stock of mortgage lending at the end of 2008. Lending
Panel data have provided a useful input to discussions between
the major lenders and Bank staff, giving staff a better understanding
of the business developments driving the figures, and this intelligence
is reflected in the report.[71]
In April 2009, using this new data, and supplemented
by the Bank's existing surveys and data as well as its network
of agents, the Bank began to publish a new document on credit
conditions called Trends in Lending.
41. However, the new data collected in the aftermath
of the crisis was 'ad hoc' in nature, and not systematically published.
In July 2010, the Bank undertook a review of business lending
data collection in consultation with the British Bankers' Association
(BBA) Statistics Advisory Panel. The resulting proposals were
published in October 2010, and led to the creation of Form
LN, Lending to Businesses—a new set of data to be collected
systematically from banks on a regular basis.[72]
42. For SME lending, a key output of this new data
collection was the data series Monetary financial institutions
loans to non-financial businesses, by size of business.[73]
This series was first published in the January 2013 Monetary
& Financial Statistics release.[74]
It separates business lending into small and medium sized enterprises,
and large corporates. Data in the series is available from April
2011, with corresponding quarterly data from Q2 2011.[75]
43. In the immediate aftermath of the crisis, the
Bank also published a set of specific of SME lending figures as
part of Project Merlin—an agreement between Banks
and the Government regarding lending to businesses.[76]
However, this was only published for 2011 and was not collected
under the Bank of England's statistical code of practice, as it
used inconsistent definitions across the different submitting
banks.[77] Most recently,
the Bank has also published some SME lending data through its
Funding for Lending Scheme (FLS). FLS lending data has been published
since April 2014, and is available on a quarterly basis from Q1
2014.[78] However, coverage
of the data is limited only to FLS participants and is therefore
not comprehensive.
44. Before 2011, virtually no data from official
sources on the stock and flow of SME lending was published. However,
some data was collected by private sector organisations. For example,
the BBA publishes monthly statistics on SME lending covering a
portion of the SME credit market—major high street banks.[79]
DATA ON ALTERNATIVE LENDERS
45. Under the Bank of England Act 1998, the Bank
of England's statutory powers to gather information are limited
to deposit-taking institutions, organisations who have issued
debt securities, and institutions who have extended secured credit
for residential purposes.[80]
46. Trends in Lending has done some work on
documenting lending from alternative sources. For example, the
October 2014 issue provides information on the contribution to
business credit provision from alternative lenders such as peer-to-peer
lending and asset-based finance. However, data and analysis from
the Bank of England has been based upon industry estimates, and
not its own data.[81]
The Bank itself does not publish its own data on lending from
many alternative sources, in particular crowdfunding or peer-to-peer
lending.
47. Evidence suggests, however, that use of alternative
lending sources is increasing amongst SMEs. The Bank of England's
April 2014 Trends in Lending said:
SMEs' use of alternative sources of finance to
borrowing from banks is increasing. In 2013, contacts of the Bank's
network of Agents reported a growing use of non-bank finance by
SMEs, albeit from low levels, including peer to peer lending,
crowdfunding and venture capital funds.[82]
Anil Stocker, CEO and co-founder of alternative lender
MarketInvoice, told the Committee:
[…] you have to look at the growth rates.
We have grown 465% this year compared to last year. Yes, we are
off a small base, but I think I speak also for other alternative
funding platforms where, if you extrapolate our growth rates,
we could become a serious force in SME lending. We will not be
called alternative any more; we will be more called mainstream.[83]
48. SMEs' negative perceptions of banks' willingness
to lend appear to have resulted in an increased reluctance of
SMEs to apply for credit. However, these perceptions may also
be too pessimistic—SMEs may be more likely to have their
applications for credit accepted than they perceive.
49. The divergence of businesses' and banks' perceptions
of the availability of credit is partly the result of past behaviour
by the industry. Sir Andrew Large's Independent Lending Review
found, for example, that RBS claimed to approve 80 per cent of
loan applications, but that this figure did not take into account
the informal rejections that customers often faced during the
early stages of an application. While it is difficult to measure
how serious a deterrent this has been, it is one explanation as
to why RBS has struggled to convince many customers that it is
"open for lending".
50. While businesses may not all directly take
an interest in lending statistics themselves, their perceptions
of the lending environment are influenced by commentators and
the media, who do. The publication of data on bank lending can
therefore help to improve businesses' understanding of banks'
willingness to lend. Recent efforts by the Bank of England to
collect data on SME lending are welcome. However, this new data
has only been collected as a reaction to the crisis. Data on the
stock and flow of SME lending was extremely limited until 2011.
This makes it difficult, for example, to determine how current
levels of SME lending compare with the period before the financial
crisis. The Bank of England should examine the case for expanding
its work on SME lending by increasing the collection and publication
of SME lending data; for example, the publication of lending to
SMEs disaggregated by industrial category.
51. Improvements in the publication of information
also assist policymakers, who need to have accurate data on credit
conditions.
- The amount of lending from alternative sources
is not yet well documented. Official sources barely record it
at all. As alternative lenders grow, it is important that their
contribution to the SME funding market is recognised and understood
as part of a wider picture of business lending. The Bank of England
should consider whether it needs to begin routinely collecting
more lending data from non-bank sources. If it believes additional
data collection is necessary, it should examine its existing data
collection powers and write to this Committee and to the Treasury
if it believes that they are insufficient.
8 Bank of England, Measures of lending to UK businesses,
29 September 2014 Back
9
Bank of England, Explanatory Notes-Monetary financial institutions
loans to non-financial businesses, by size of business, as at
2 February 2014 Back
10
Bank of England, Trends in lending April 2009, 21 April 2009 Back
11
Bank of England, Trends in lending October 2011, 20 October 2011 Back
12
Bank of England, Monetary financial institutions loans to non-financial
businesses, by size of business, 2 January 2015 Back
13
Bank of England, Trends in Lending July 2014, 18 July 2014, p
5, chart 1.1 Back
14
Oral evidence by Alan Clarke to the Treasury Committee, 9 December
2014, q 36 Back
15
Q 135 Back
16
Q 81 Back
17
Q 82 Back
18
Oral evidence by Kevin Daly to the Treasury Committee, 9 December
2014, q 36 Back
19
SME0092 Back
20
SME0092 Back
21
SME0011 Back
22
Q 105 Back
23
SME0080 Back
24
SME0011 Back
25
Q 89 Back
26
SME0103 Back
27
SME0080 Back
28
SME0011 Back
29
SME0083 Back
30
SME0011 Back
31
BDRC Continental, SME Finance Monitor Q4 2014, 26 February 2015,
p 151 Back
32
SME0011 Back
33
SME0011 Back
34
SME0093 Back
35
SME0080 Back
36
Sir Andrew Large, Independent Lending Review, November 2013, p
12, para 3.1 Back
37
Department for Business, Innovation and Skills, SME access to
finance schemes-measures to support SME growth, April 2013 Back
38
Department for Business, Innovation and Skills, Understanding
the Enterprise Finance Guarantee, updated 14 July 2014 Back
39
Department for Business, Innovation and Skills, SME access to
finance schemes-measures to support SME growth, April 2013, p
11 Back
40
Q 167 Back
41
Q 167 Back
42
BMG Research, SME Journey Towards Raising External Finance, October
2013, p 3-4 Back
43
SME0104 Back
44
SME0104 Back
45
Q 170 Back
46
Q 172 Back
47
British Business Bank, Strategic Plan, June 2014 Back
48
Oral evidence by Keith Morgan to the Business, Innovation and
Skills Committee, 2 December 2014, q 220 Back
49
Stuart Fraser, Back to borrowing? Perspectives on the 'arc of
discouragement', March 2014, p 3 Back
50
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 50 Back
51
SME0092 Back
52
SME0038 Back
53
SME0011 Back
54
SME0046 Back
55
SME0046 Back
56
Stuart Fraser, Back to borrowing? Perspectives on the 'arc of
discouragement', March 2014, p 3 Back
57
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 4 Back
58
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 56 Back
59
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 56 Back
60
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 56 Back
61
Sir Andrew Large, RBS Independent Lending Review, 25 November
2013, p 55 Back
62
SME0101 Back
63
Q 86 Back
64
BBA, BBA Q1 2014 SME lending statistics release and response to
latest FLS, 29 May 2014 Back
65
BBA, BBA Q2 2014 SME lending statistics release and response to
latest FLS, 28 August 2014 Back
66
Federation of Small Businesses, Small businesses still struggling
to access finance, says FSB, 28 August 2014 Back
67
Forum of Private Business, Latest Funding for Lending SME figures
disappointing says Forum of Private Business, 28 August 2014 Back
68
"SMEs feeling the pinch as Funding for Lending fails to pick
up," Angela Monaghan, The Guardian, 28 August 2014; "Business
lending continues to contract despite revamped Funding for Lending
rules," Szu Ping Chan, The Telegraph, 28 August 2014; "Bank
of England business lending scheme questioned as credit for companies
falls by £3.9bn," Thisismoney.co.uk, Camilla Canocchi,
28 August 2014 Back
69
Bank of England, Measures of lending to UK businesses, 29 September
2014 Back
70
Bank of England, Lending to businesses - a new data source, March
2012, p 1 Back
71
Bank of England, Trends in Lending April 2009, 21 April 2009 Back
72
Bank of England, Lending to businesses - a new data source, March
2012 Back
73
Bank of England, Explanatory Notes - Monetary financial institutions
loans to non-financial businesses, by size of business, as at
20 October 2014 Back
74
Bank of England, Bankstats (Monetary & Financial Statistics)
January 2013, 1 March 2013 Back
75
Bank of England, Explanatory Notes - Monetary financial institutions
loans to non-financial businesses, by size of business, as at
20 October 2014 Back
76
House of Commons Library, Project Merlin, 14 February 2013 Back
77
Bank of England, Additional data for lending to UK businesses
including "Project Merlin" data, as at 20 February 2015 Back
78
Bank of England, Funding for Lending Scheme-usage and lending
data for the first part of the scheme, as at 20 February 2015 Back
79
BBA, High street banking-January 2015, 25 February 2015 Back
80
Bank of England Act 1998 Back
81
Bank of England, Trends in Lending October 2014, 20 October 2014,
p 13, Chart B Back
82
Bank of England, Trends in Lending April 2014, 22 April 2014,
p 9 Back
83
Q 921 Back
|
