Last year, the government announced the launch of a new scheme which was set to stimulate the economy. The Funding for Lending Scheme, which began in August of 2012, allowed banks and building societies to increase lending to UK households and businesses so that funds could be made more readily available for things such as mortgages or business loans. But, according to the latest figures, even though 39 lenders have signed up to the scheme, only 13 people are actually using it and lending actually fell in the last three months of 2012. So, the question remains as to why the FLS is not working as it should be and if not, why not?
If a bank was to sign up to this scheme, it can borrow money cheaply from the Bank of England – as long as that money is then lent out again to consumers and small businesses. After the Eurozone crisis, banks in the UK were facing higher funding costs which were to have a knock on effect on lending as these costs were passed on through the chain. This was, of course bad news for creditworthy small businesses who were denied credit unfairly – so on the outside it seemed that the Funding for Lending Scheme was a welcomed ray of light in the grey, deep winters of the UK’s bleak economy state.
But, it appears that very few people are yet to see a positive effect of this. Granted, it is still very early days, and it could take a while for this to build up – that is until you look into some of the areas that the FLS should be benefitting who have in fact seen a decline.
The mortgage market, for example, is something which the FLS was designed to help, but it has in fact temporarily stalled. The number of people taking out mortgages in February of 2013 actually fell, according to the British Banker’s Association (BBA). Around 30,000 loans were approved which is 6% lower than in February 2013 and overall the amount of money being lent to homeowners fell by £65m, compared to January.
The Bank of England also reported that, as well as individuals, net lending to businesses suffered too with overall lending falling by £2.4bn in the last quarter of 2012. Retailers were the worst hit, and according to our own latest figures here at Wilkins Kennedy, in the year to the end of December 2012, banks appear to have cut the amount they lend to retailers by around 5.7%. Over the last three years, loans to High Street shops had fallen by more than 18% and it is figures such as these which begin to make one wonder if recent casualties such as Jessops, Comet and Blockbuster could have in fact been prevented if such lending had been granted.
So is the Funding for Lending Scheme actually working?
Giving banks access to cheaper funding has also been playing havoc with savings accounts too as banks offer less in rates to savers as the need to raise capital lessens. Business and mortgage lending are down and even Vince Cable himself has admitted that the Scheme may need “adapting”, but the banks themselves also need to be “ready” to lend more freely and be less scrutinising with who they are lending to. It sounds radical, but, after all that is what the funding is there for, so more businesses and individuals should be taking advantage.
But other measures have since been introduced to suggest that there are weaker areas of the FLS that need addressing.
If we look at the Chancellor’s recent Budget, for example, this covered a Help to Buy scheme that will commit £3.5bn of capital spending to offer equity loans worth up to 20% on a new build home for anybody looking to move up the mortgage ladder.
He also spoke about a new mortgage guarantee, which will be sufficient enough to support £130bn worth of loans and is set to be introduced to help people who cannot afford a big deposit. It is hoped that measures such as these – added to the fact that those who are already in a mortgage will benefit from the lower interest rates – will help to stimulate the mortgage market so that 2013 could see the number of loans rise.
As for small businesses, the Budget also outlined plans to “take the tax off jobs” to help small businesses that need to grow, creating an employment allowance to reduce every business’ National Insurance payroll taxes by £2000. So, businesses are still being supported, but it remains to be seen as to whether or not the Government has done enough.
Hopefully, it will just be a matter of time and once the banks that have access to the money, they need to stop kicking their heels as they struggle to let go of their old mind set. Is being less scrutinising in order to approve more loan applications going to help? Are the government doing enough to stimulate lending? Only time will tell – after all you have to spend money to make money.