Small business lending needs greater 'scrutiny'

The government has been urged to clarify the levels of lending that banks are making to small businesses.

The call came from the Forum of Private Business (FPB), which said more must be done to scrutinise the behaviour of banks through the Small Business Lending Monitoring Panel.

The panel, which comprises officials from the Department of Business, the Bank of England and the Treasury, has met five times since it was set up in November 2008.

No minutes have been published detailing the discussions of those meetings as they involved commercially sensitive data.

However, the FPB argued that, back in January, the Treasury Committee recommended that the panel “provide regular updates on the actual lending by the banks to the real economy”.

Matt Goodman, the policy representative for the FPB, said: “There is a real sense of confusion about the amount of money being lent by the banks and the nature of that lending.

“Our members are reporting little change in their ability to borrow, which has been severely compromised as a result of the credit crunch. In addition, we are hearing about steep fees, excessive charges and additional security being demanded. Consequently, confidence in both the government and banks is eroding.”

As part of its 2009 Budget submission, the FPB presented the findings of its fifth Economic Downturn Panel survey of members, which was carried out in March.

Some 35 per cent of respondents called for action in the forthcoming Budget to improve access to finance, while 29 per cent wanted measures to reduce the cost of credit.

The survey showed that, for 94 per cent of the businesses surveyed, terms and conditions of loans had not improved. On average, interest rates were 5.6 per cent over the Bank of England base rate (at 1 per cent during the survey period).

In total, 81 per cent of respondents saw no change in the terms and conditions of overdrafts, with interest rates 5.8 per cent above the base rate, on average. In addition, 24 per cent reported increases in banking fees in March.

The latest figures from the British Bankers’ Association (BBA) showed that overall bank lending increased by more than £200 million in February 2008, similar to the rise in January.

However, the FPB pointed out that vital overdraft lending has not been restored to its pre-December 2008 levels, when overdrafts fell by £457 million. The number of businesses establishing new banking relationships also decreased in February, the FPB added.