Funding for Lending’: innovation or desperation?

The Chancellor of the Exchequer’s scheme to improve the financing of SMEs is, at first glance, creative. In principle banks and building societies will be able to secure their own funds for a fee of 0.25% a year providing it is net new lending. If their advances fall the fee can increase up to 1.25% pa. Up to £80 billion is being made available. The scheme will also apply to individual lending. Institutions will be able to borrow up to 5% of their existing loan book.

In November 2011 the Chancellor, in his autumn statement, trumpeted the introduction of the SEED/EIS scheme. In this plan, companies up to two years old and with assets of less than £200,000, can raise once only up to £150,000 equity finance. Qualifying investors (the maximum for any one individual is £100,000) will be entitled to 50% income tax and up to 28% capital gains tax reliefs, dividends and share gains being tax free. Nearly nine months later the scheme is still awaiting the passing of the Finance Bill which is still in the House of Lords. The section on the SEED/EIS rules is sixty two pages long. The Inland Revenue are refusing to discuss it until the regulations are enacted.

‘Funding for Lending’ follows on the path of Project Merlin, the credit-easing plan and of course Quantitative Easing  (“QE”) with another £50 billion soon to be introduced.

If the Governor of the Bank of England is tough enough to get rid of Bob Diamond from Barclays Bank why doesn’t he simply tell the banks to lend more money to SMEs? These are the issues:

  1. The Financial Services Authority (“FSA”) are telling the banks to strengthen then capital ratios.
  2. There is new EU regulation coming in to achieve exactly the same result.
  3. The banks are very worried about a collapse of the euro and the consequences for their inter-bank debt position.
  4. There is not a great demand for new finance: few new businesses are being started.
  5. The banks don’t like lending to SMEs: they are too much trouble for too little reward.
  6. The ‘Funding for Lending’ scheme does not offer any guarantee on bad debts: the risk profile, which leads banks to turn down applications, remains the same.

The scheme may well appeal to smaller banks and building societies. There may be some innovation because at face value it is a good initiative.

Will it succeed? All questions please to the incoming Chancellor of the Exchequer William Hague MP.


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