Banks ‘not meeting lending targets’

Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander UK agreed with the Government to increase lending to small and medium enterprises (SMEs) to £76 billion this year.

The banks also pledged to boost overall business lending to £190 billion.

But it has been reported that the Bank, in its first quarterly lending data report, is expected to show the banking giants are falling around £2 billion to £3 billion short on the SME target of £19 billion in the first three months of the year.

The Project Merlin agreement, unveiled in February, followed protracted talks between the top five banks and the Treasury over key issues such as bonuses and lending.

Some economists expect the banks will claim there is no demand for lending - not that they are unwilling to offer credit.

The banks will say they only agreed to increase “lending capacity” and there is nothing they can do in the absence of demand for new borrowing.

But Vicky Redwood, economist at Capital Economics, said businesses claim they are not asking for the loans because they do not think they will get them.

She said: “The agreement left unclear what action the Government might take if the banks failed to uphold their promises.

“In any case, the Government is unlikely to do anything yet. After all, the agreements were for 2011 as a whole and it is only fair to let the banks try to get back on track.”

A £2.5 billion fund was launched by the Government and the UK’s biggest banks to provide loans to small and medium-sized businesses across the UK which have struggled to raise cash since the financial crisis.

The Business Growth Fund (BGF) was set up with the support of the UK’s largest banks to provide long-term capital of between £2 million and £10 million to businesses with turnovers of between £10 million and £100 million.

Business secretary Vince Cable said it was too early to judge the Merlin deal but warned banks to raise their game.

He said: “There clearly is a problem, particularly for SMEs who can’t go to capital markets. But it is still early days and I don’t want to say Merlin is a failure. It is one of a series of initiatives that will help raise confidence.”