Report: Small Firms In Credit Drought Fear
Bank lending to corporate clients is set to drop to its lowest level for six years despite Government funding, a new study suggests.
According to the Ernst & Young ITEM Club, a funding gap for small and medium enterprises (SME) will remain even though Government funding has been announced.
The study said corporate lending is forecast to drop by £429bn at the end of 2012.
The annual rate of contraction is estimated at 4.6%, which is markedly slower than the 6.1% decline during 2011.
It said positive growth is forecast to resume from 2013, but corporate loans will not recover to 2008 levels† - the year of the global financial crisis - until 2016.
Item Club senior economic adviser Carl Astorri said: "The good news is that 2012 is likely to be the last year of such marked deleveraging in the UK - the bad news is that, once again, SMEs will bear the brunt of it.
"Government schemes to increase lending may help a lucky few but, as banks are encouraged by regulators to store up more capital and to look again at their forbearance policies and so-called bad-loan books, most small business are going to continue to feel the squeeze."
According to surveys from the Office for National Statistics (ONS) and Warwick Business School, the rejection rates for SME loan applications have trebled recently.
Rejection rates averaged around 11% between 2005 and 2008, whereas the rate in mid-2012 averaged around 38%, the Federation of Small Businesses and the SME Finance Monitor said.
The loan rejection rates provide an indication of the 'financing gap' facing SMEs over the coming year, experts believe.
Data from the Bank of England indicate that gross lending to SMEs amounted to £44.2bn in the 12 months to the first quarter of 2012.
If this lending data reflects a rejection rate for credit of 38%, then lowering the rejection rate to the pre-crisis level of 11% would imply the need for additional loan facilities worth around £19bn.
In September, Business Secretary Vince Cable announced the first steps of a Government-funded British business bank to help SMEs grow.
Mr Astorri said: "The figures suggest that the British business bank's lending capacity could be exhausted in less than a year.
The new bank's aim was to attract private sector funding so that when fully operational it could support up to £10bn of new and additional business lending.
"Its impact will also be reduced by competition with private sector lending activity - even if the Government aims to lend at market interest rates, it is unlikely to be able to avoid displacing existing lending activity," Mr Astorri said.
"Indeed, we expect the business bank will have to compete for projects that are commercially viable, and so we do not think the scheme will have a tangible impact on the economy."
The study also found that there was evidence that lower funding costs were being passed on to homeowners following implementation of the funding for lending scheme in July.
It also found that contraction in profits of the insurance industry would slow from 31% in 2011 to 9.5% this year, before a slow recover from 2013 onwards.
The Item Club said the combination of continued low interest rates, higher hedging costs, lower business volumes and more onerous capital requirements continues to create a challenging environment for UK insurers.