A new government initiative to push banks into lending more money to businesses and consumers has started.
Under the ‘Funding for Lending’ scheme (FLS) the Bank of England will make it easier for banks to borrow money at below market rates, with the intention that this will in turn, be lent on to businesses and individuals. The banks who receive the funds will be monitored to ensure that their lending increases.
Lending to businesses
The Bank says that the FLS is “designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies”.
Businesses have been complaining for many months, perhaps years, that the banks are not lending money and when they do the terms are uncompetitive. Official figures, showing that lending to businesses has shrunk by 17% over the past four years, seem to back up these concerns.
Economic experts believe that the banks unwillingness to lend is one reason why the economy is back in recession and struggling to recover from the 2008 slump.
Housing experts also believe that tight lending criteria is one of the reasons behind the sluggish housing market, which has seen house prices fall since the start of the credit crunch.
RBS join the ‘Funding for Lending’ scheme
RBS has already announced it will take part in the scheme and believes that the average interest rate on loans to businesses will be cut by around 1%.
Whilst other banks are expected to follow this lead, business leaders are concerned that although the interest rate may be lower, the real problem is the unwillingness of banks to lend in the first place. A point emphasised by John Walker, National Chairman of the Federation of Small Businesses (FSB) who said: “The main objective for any government-backed scheme should be to ensure that the finance actually gets through to small firms.”
He continued: “Four in 10 small firms were refused (bank credit) in the second quarter and this needs to change if the economy is to grow.”
“Communication will be key, whatever the name of the scheme, to ensure that businesses actually benefit from it.”
The FLS will replace the existing National Loan Guarantee Scheme, which was only launched five months ago and has accounted for £20 billion of lending.
The announcement of the new scheme was greeted by scepticism in some quarters, not least by Chris Leslie, Shadow Treasury minister, who said: “Despite promises from ministers, net lending to businesses has fallen in every month of this government.”
“And there are serious questions about whether the new Funding for Lending scheme will really see lending to businesses become cheaper and easier to access.
Lower fixed rate mortgages
Some of the major banks, such as HSBC and RBS have already introduced fixed rate mortgages at all time low interest rates. Some banks are now offering five year fixed rate mortgages with an interest rate of less than 3%, although a large deposit is required to secure such a deal.