Lending to small firms falls by £400m as banks focus on tough capital rules

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Britain’s much-heralded scheme to encourage banks to make more credit available to households and businesses failed to boost lending in the second quarter, data showed, as banks focused on meeting tougher capital demands from regulators.

The Bank of England launched its Funding for Lending Scheme (FLS) in August 2012 as a key part of government efforts to stimulate the economy, with banks having since drawn down a total of £45.7bn ($75.8bn) of funding.

The scheme was tweaked last November to end incentives for mortgage lending with the intention of persuading banks to focus on businesses, but data from the Bank of England yesterday showed that net lending to businesses fell by £3.9bn in the second quarter of this year, widening from a £2.7bn drop in the first quarter.

Lending to small businesses fell by £400m, though that was an improvement on a decline of £719m in the first quarter.

The biggest banks have cut back on lending and shed assets to meet tough rules on capital that were imposed by regulators to prevent a repeat of the 2008 financial crisis. Banks have also pointed to a lack of demand from borrowers.

“Funding for Lending is failing to help the thousands of British businesses that need finance but can’t access it,” said James Meekings, co-founder of Funding Circle, one of Britain’s biggest online lending platforms.

“Instead, alternative sources of finance, like peer-to-peer lending, are proving to be a better way for the Government to get finance through to British businesses,” Meekings added.

Fewer smaller businesses in Britain are using traditional forms of bank financing, such as overdrafts, loans and credit cards, a survey showed.

The data showed that the biggest declines in lending came at state-backed Lloyds Banking Group and Royal Bank of Scotland, where net lending contracted by £2.1bn and £1.5bn respectively.