Business Secretary Vince Cable had a treat for the Lib Dem faithful today – a new plan to save Britain’s small businesses from going to the wall after years of tight credit conditions.
Scheme after scheme has come and go under the coalition with the same laudable aim. Will a new government-back bank succeed where so many have failed?
What’s it all about?
A new state-owned business bank to boost lending to small and medium-sized businesses, with £1bn of government cash on the table.
It’s Mr Cable’s pet project and he hopes the private sector will stump up an additional £9bn in investment capital.
That’s about all the detail we’re going to get until the chancellor’s Autumn Statement.
Why do we need it?
Because the banks are still not lending to small businesses, despite numerous government and industry initiatives.
First there was Project Merlin, which saw banks agree to lend £76bn to small businesses in 2011. They missed the target by £1.1bn and, more importantly, the figures were for gross lending – which doesn’t include money being paid back to the bank by businesses.
Repayments went up, so net lending actually fell in 2011.
Then there was the National Loan Guarantee Scheme, which ministers launched in April 2012 but began to wind down less than six months later.
The government offered Barclays, Santander, Lloyds and RBS up to £20bn of guarantees. This allowed them to borrow more cheaply, and they were supposed to pass lower interest rates on to small businesses.
But only £2.5bn was lent out, and interest rates on loans under £1m actually went up.
This has been superseded by Funding for Lending, similar in design but with the stakes raised to £80bn. Neither “credit easing” scheme appears to have any guarantees built into it that banks really will pass on the savings. In other words, there’s nothing to stop bankers using it to increase their profits or indeed pay themselves bonuses.
Other, smaller schemes have been launched, with similarly uncertain results.
The bottom line is that Bank of England figures for growth rates in lending to small firms have been in a downward spiral since 2009 and are showing no signs of improvement.
Mr Cable’s Department for Business, Innovation and Skills (BIS) surveyed small firms in 2010 and found that 26 per cent of businesses that had tried to get loans had failed. In 2007/08 it was just 10 per cent.
But what if the banks are right?
One question that springs to mind is whether the banks were lending too much money before the credit crunch and are right to be more cautious now. But the government insists that is not the case.
This BIS document says this isn’t just a sudden snag in the pipeline but a historical, structural problem. Banks are generally too cautious with small businesses because it costs too much for lenders to assess their creditworthiness properly.
The report also refutes the accusation often made by the banks: that this is a problem of demand, and lending is low because firms are not asking for money.
BIS says low supply and demand are both to blame for the small business credit drought.
The research all this is based on is more than two years old now but the latest Bank of England surveys show an expected rise in demand for credit among small and medium-sized enterprises in recent months.
When will the Bank of Vince be up and running?
A moot point. The business secretary says within 18 months. The Institute of Public Policy Research, who set out their vision of a British Investment Bank last week, says at least two years.
The Green Investment Bank was supposed to be operating by April 2012, but that deadline has slipped, largely because the European Commission has delayed making a decision on state aid approval.
Under European rules, government-backed schemes like these have to prove they are not unfairly undercutting private competitors.
It’s a complicated process that Mr Cable’s new baby will have to go through too. It’s entirely possible that no loans are made until 2015, by which time everyone hopes Britain will be out of recession anyway.
So is the whole thing a waste of time?
Not necessarily. As we have seen, Mr Cable says he is trying to do is to rectify an age-old problem, which was in fact first identified in 1931. His bank isn’t really designed to offer a quick fix.
Tony Dolphin from the IPPR told us: “This is Vince Cable attempting to leave a legacy. Things like Project Merlin were really emergency measures and this is a little different and seems a lot more considered in terms of addressing the specific long-term financial weakness.”
Where’s the money coming from?
Departmental underspends, which total more than £6bn. This pot of spare cash is also being used to finance Chancellor George Osborne’s U-turn on raising fuel duty, but that’s “only” £550m. No doubt the piggy bank will be raided for other commitments, but we won’t know how Mr Osborne balances the books until his statement on 5 December.
Is £1bn going to be enough?
A huge moot point. The IPPR’s report envisages a commitment of £40bn over four years. This is a one-off promise of £1bn. BIS told us scheme is being modelled on similar state-run banks in Germany and the US, both of which are lending out far more.
Germany’s KfW lent more than £23bn in 2010 and £18bn last year. Various US programmes support lending in the region of tens of billions a year.
Tony Dolphin said his biggest concern was the size of the cash pot and the lack of clarity over whether more money would be forthcoming in the future.
By Patrick Worrall