Bank extends loan help for small firms by two years

The FLS was due to be wound down early next year. But Bank Governor Mark Carney and Chancellor George Osborne have agreed to prolong it until early 2018

The Bank of England scheme will allow banks to gain access to £5 of cheap funding for every £1 they lend to SMEs (Getty)

The Bank of England made a new bid to address “relatively tight” credit conditions for small and medium-sized firms yesterday, as it extended its Funding for Lending (FLS) credit scheme for another two years.

The FLS – introduced to counteract a sharp rise in bank funding costs in 2012, during the worst stage of the eurozone crisis – has been focussed on business lending since November 2013. Under the scheme, banks gain access to £5 of cheap funding from Threadneedle Street for every £1 they lend to SMEs.

The FLS was due to be wound down early next year. But Bank Governor Mark Carney and Chancellor George Osborne have agreed to prolong it until early 2018, gradually tapering down the allowances available.

While credit conditions for small businesses have been improving, Mr Carney wrote to the Chancellor that they remained “relatively tight” compared to larger companies. According to the Bank’s latest figures, outstanding loans to SMEs stood at £164.2bn in October, against £169.4bn a year earlier. Net lending – gross lending less repayments – to large businesses was £1.9bn over the month, compared to £0.5bn loaned to SMEs.

The Bank is also tweaking the FLS to encourage more challenger banks to tap the scheme for funds. Existing members will only earn more allowances for FLS funds on loans made up to the end of this year. New members authorised after April 2013 will in contrast earn allowances on loans made over the next two years, allowing them a bigger FLS pot to draw on. Mr Carney said this “will ensure that newer banks are not placed at a disadvantage relative to other participants”.

Paul Lynam, chief executive of challenger bank STB said the changes were “public recognition” that credit to SMEs was being restricted. “The big guys are capital constrained so they are piling into mortgages,” he said. According to Bank documents, new banks will earn allowances for mortgage lending as well, potentially enabling them to expand home loans as well as corporate credit.

Consumer credit is meanwhile growing at the fastest annual pace for nearly a decade. The latest figures for October showed consumer credit up 8.2 per cent on last October. The last time consumer credit grew at a faster annual pace was in February 2006, long before the credit crunch. Mortgage approvals rose 2 per cent to 69,630.

Banks taking part in the FLS lent a net £1.1bn to small and medium-sized businesses in the first half of 2015, in contrast to a net reduction in lending of nearly £2bn last year. The most significant net lenders to SMEs during the period were Lloyds Banking Group and the new challenger Aldermore.

“Since its launch in 2012, the FLS has provided an important source of funding support to banks, which has flowed through to improved credit conditions across the economy,” Mr Carney said. “As conditions have normalised … we have consistently reduced the scope of this temporary scheme and focused support where it is needed most … [Yesterday’s] announcement continues that tapering, supporting continued improvement in SME credit conditions, as the economic recovery takes hold, while gradually withdrawing that support over the next two years.”