Conduct and competition in SME lending - Treasury Contents

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]


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]


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]


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]


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]


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.

  1. 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,", 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

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Prepared 13 March 2015