Banks must overcome their fear of lending
A number of UK banks report increased lending to SMEs in 2010 and government initiatives are underway to increase credit availability to businesses. Yet, a leading financial training consultant says banks are being "too safe" in their lending.No one would disagree that small businesses gaining access to working capital for expansion, investment and exports is vital to not only the UK's but the global economic recovery. But when it comes to banks' willingness to lend to these very same SMEs, one gets a very mixed picture.
On the one hand you have banks like RBS and HSBC saying they increased their lending to SMEs in 2010. In its annual report, RBS said it helped more than 103,000 new businesses enter the market in 2010, a 1.9% increase on 2009 levels, which it says remains in line with its SME Charter commitment. More than 90% of SME customers who renewed their overdraft facilities in 2010 did so at the same or lower margin as before, said RBS.
In its annual report HSBC stated that in the UK it increased new lending to SMEs by 19% in 2010, and opened accounts for more than 125,000 customers starting new businesses. It is also participating in loan guarantee schemes for SMEs in other parts of the world.
In the UK, the government's Project Merlin initiative is designed to try and get the UK's major banks to increase lending to businesses, while making other concessions on bonuses and increased transparency. As part of the deal between the UK Treasury and the UK's Big Four banks, lending to businesses is expected to increase to GBP 190 billion in 2011, and GBP 76 billion of that total is expected to be made available to SMEs, which represents a 15% increase on 2010 levels.
But Project Merlin is not asking the banks to reduce their lending standards or criteria when it comes to SMEs, so that additional funding is contingent on SMEs meeting the banks' lending criteria, which by all accounts has become even more conservative in the wake of the credit crisis, depending on the bank's geographical spread and risk profile. So, for example, those banks that have less corporate delinquencies on their books, namely banks in Asia, for example, may be more inclined to lend to SMEs. In the UK and Western Europe, where corporate delinquencies and loan impairments are higher, the situation could be somewhat different.
Furthermore, SMEs themselves and industry observers say banks need to approach lending to SMEs differently and not just focus on their balance sheet and P&L, but on the strength of their supply chains and relationships with buyers globally, as well as the track record of these relationships. But unless the bank already knows the SME via a local or corporate banking relationship and can see these flows, they may not have visibility of that information.
Lawrence Galitz of ACF Consultants, which provides training and consultancy for some of the world's largest banks, is critical of Project Merlin, saying the Government initiative has handed the banks a "get-out clause" by allowing them to lend to only ‘viable’ and ‘high quality’ borrowers.
“Who or what is a ‘viable’ or ‘high-quality’ borrower is still entirely up to the banks to decide,” says Galitz.“Presumably ‘high-quality’ means those borrowers who don’t actually need the funds in the first place. Project Merlin will manifest itself in words rather than deeds.”
According to Galitz, many banks are hiding their reluctance to lend by reporting a downturn in demand for loans in recent months. “Banks may claim demand is down but in many cases requests are being stifled before a formal application is made,” he asserts.
“If a business completes a formal application and is then turned down, it doesn’t look good on the bank’s statistics. But if the bank informally tells a business “don’t even bother applying”, then it can blame the lack of demand on businesses rather than on their unwillingness to lend.”
Galitz says unless banks overcome their fear of lending, the economy could enter a second period of stagflation - low economic growth and high inflation.
“Having had their fingers burned by the bad lending decisions that led to the credit crisis of 2007-2008, banks now seem to be leaning heavily the other way, and are being too safe for the good of the economy,” said Galitz.
While many would argue that levels of lending to SMEs are too low, the banks may counter that they don't want to return to pre-crisis levels of lending, which was not correctly priced in terms of risk. The question SMEs need to start asking themselves is what are alternative forms of financing available to them: factoring, trade receivables, export credit agencies? And what about the peer-to-peer lending models we are seeing in the consumer space where people are looking for a higher rate of return on their excess cash other than putting it in a low-yielding bank account? Do these P2P models have wider application when it comes to lending to small businesses?
Image provided by nuttakit.
Date Posted:28th February 2011