Funding for Lending Rate “Disappointing”

According to its own research, the Bank of England’s Funding for Lending scheme (FLS), which started in August, has got off to a “disappointing” start, as lending to businesses and individuals fell by £5bn that month, which contrasts with an average monthly rise of £900m in the previous six months.

The FLS was designed to stimulate the economy by making cheaper loans available to firms and individuals. Some 13 institutions signed up in the early stages, including five of the big six UK banks with the only exception being HSBC.

Under the terms of the scheme, institutions can borrow the equivalent of up to 5 percent of their loan books immediately, and more if they meet certain conditions over the next year.

However, the findings show that even when taking into account one-off factors such as the Olympics, bank lending to businesses fell by £1.2bn, the largest monthly decline since February, while loans from banks to other financial bodies fell by £3.1bn and loans to individuals declined, by £600m.

Detailed figures from the Bank also show that the average interest rates on new savings in August were down 0.1 percent, as the cheap funding on offer from the Bank gave banks less incentive to attract retail deposits.

The average rate on loans to businesses edged only slightly lower, to 2.66 percent.

It is believed because of the newness of the scheme, businesses should not expect much of an increase in the supply of credit in the fourth quarter of this year either, while small firms may even find that loans get more expensive.

The figures, particularly for SMEs, appear to support the case for the setting up of a state-backed business bank to increase access to finance for small businesses.

As an accountant, Sarah Jenkins, specialises in management accounting, business development and financial reporting.

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