Cheap funds for lenders in bid to boost borrowing

BANKS are being offered cheap funding for another year in a renewed drive to boost lending to the private sector and get the economy moving.

The funding for lending scheme (FLS) was launched in August and was expected to run for 18 months.

But the Bank of England and the government are worried that lending to small firms has still not picked up enough and so have extended the scheme and tweaked it to increase incentives to help small firms (SMEs).

On top of that, banks’ lending to other credit providers like asset finance firms and invoice finance firms – those typically used by small firms – will also be included, again potentially aiding SMEs.

“The extension of the FLS will help to maintain easier funding conditions for banks into 2015 and thereby help to support credit conditions and the recovery in our economy,” said Bank governor Sir Mervyn King.

His concerns were underlined by new data showing another dip in lending. Business lending fell by £730m in March, according to the British Bankers’ Association.

Initially banks were offered cheap funds worth up to five per cent of their loan books as of June 2012.

In exchange for collateral – to protect the public purse – they gained access to the funds to lend on.

If banks raise lending to the private sector those funds become cheaper and their allowance is increased.

Under the new setup, any increase in lending this year will result in access to cheap funds in 2014, with an extra incentive to increase lending to SMEs.

For every pound of extra net lending to mortgages or large firms in 2013, the banks and building societies will accrue a pound of cheap funding under the FLS for 2014.

For every pound of extra small business lending, they will receive an allowance of £10. Then in 2014, the same rules will apply but with a smaller weighting in favour of SMEs, designed to promote extra lending right away, as well as into next year.

Economists warned the FLS’ extension may boost the supply of credit, but not the demand for it.

“There is clearly low demand for credit with many companies still very wary about borrowing and investing in the current difficult economic environment,” said IHS Global Insight’s Howard Archer. “Furthermore, many firms are looking to pay down debt.”

WHAT FUNDING IS ON OFFER TO BANKS?

■ Banks and building societies can now access ultra-cheap funds from the Bank of England until January 2015 – an extra year on the previous setup

■ For institutions expanding their lending, the funds cost just 0.25 percentage points per year

■ Those reducing lending have to pay more, on a sliding scale up to a maximum of 1.5 percentage points per year

■ Funds provided under the scheme then last for four years

■ Under the new plan banks gain access to the scheme in 2014 if they increase lending to the private sector

■ For every £1 of additional net lending in 2013, they gain a funding for lending scheme allowance of £1 next year

■ If they lend to small firms, they get a £10 allowance for each extra £1 loaned

■ In 2014, banks can also rack up allowances, but the reward for loans to small businesses is reduced to £5 of allowance for every £1 of extra lending

■ A wider range of finance firms have also been brought into the mix

■ From now on bank and building society loans to lenders like asset finance firms, invoice finance companies, car leasing groups and specialist mortgage providers are all also included

■ That is to both level the playing field, and to draw in more of the type of lenders small firms often rely on

■ More than 40 lenders are now signed up to the scheme, but net lending fell £1.5bn in the first six months of funding for lending – a trend this extension hopes to turn around in the coming months