UK banks have failed to reach the levels of small business lending that were agreed under Project Merlin.
Project Merlin was the deal brokered by the Government in which the UK’s largest banks signed up to increased lending to SMEs.
The terms of the deal meant that loans to viable SMEs should climb to £76 billion in 2011, the equivalent of £19 billion a quarter.
However, figures from the Bank of England have suggested that bank lending to SMEs only mustered £16.8 billion in the first three months of the year. That represents a shortfall of £2.2 billion or 12 per cent.
On the broader business front, the banks pledged to lend £190 billion to firms of all sizes. In the first quarter, gross lending came in at £47.3 billion, just £0.2 billion shy of the negotiated level.
Vince Cable, the Business Secretary, has warned the banks that they could face higher tax charges if they do not come closer to the small business lending targets they have been set under Project Merlin, which was signed in February by Barclays, HSBC, Lloyds, RBS and Santander.
The minister said: “There is a serious problem with lending to good, small companies. We looked to the Merlin agreement to rectify the problem and though these are early days we want to see significant improvement over the next few months.
“We will monitor the banks’ performance extremely closely and if they fail to meet the commitments they have agreed we will examine options for further action.”
The British Bankers’ Association (BBA) countered by arguing that the numbers demonstrate the determination of the Merlin banks to lend to viable businesses, describing the data as “a solid start to the year”.
A BBA spokesman continued: “Whilst these numbers are encouraging, it is too early to draw conclusions as to the year-end outcome.
“Demand in some sectors, particularly among SMEs, remains muted, but we are devoting considerable time, effort and resource, particularly through the Better Business Finance initiatives, to ensure that we help viable businesses to access finance.”
Business groups expressed their dismay at the figures.
David Frost, the director general of the British Chambers of Commerce, commented: “The long-standing challenge around small business lending remains. Throughout the recession and even now, businesses tell us that their relationships with banks have suffered tremendous strain. There has been a crisis of confidence between businesses and banks created by years of over-centralised processes, opaque decision-making and a lack of good local relationship-managers available to businesses customers.”
But Mr Frost added that the missed SME lending targets, although disappointing, are only a part of the story. Banks, he said, have to think about how they talk to business customers and be ready to make decisions at a local level about their financing needs.
The BCC believes that encouraging businesses, who may have been dissuaded by headlines around a lack of credit, to apply for finance is essential, and that improving business lending relies on banks providing greater transparency and local support, not just national targets and numbers.
Mr Frost concluded: “We’re encouraged by the measures put in place by the Business Finance Taskforce, to help UK business thrive and grow. Money must reach the most productive parts of the economy. But transforming the relationships between banks and business customers will not happen overnight. Rebuilding trust will rely on banks, politicians and businesses working together to change for the better.”