Bank Lending to SMEs is Falling… But That’s Just One Side of the Story

Posted on 04.12.2013

The latest figures from the Bank of England continue to show how banks are struggling to support SMEs when it comes to access to finance… but is that really the case?

The quarterly figures to October for bank lending to SMEs reveal that the total stock of loans to SMEs has declined by £1.4b during the three months.

As would be expected this fall in lending has been heralded as another example of how banks are not supporting SMEs. However, a closer look at the figures show that bank lending to SMEs is actually increasing when compared to the same period last year but this is being offset by repayments. In other words, small businesses are paying debt down quicker than they are borrowing it back.

New loans (excluding overdrafts) extended to SMEs between August and October totalled £10.4bn. The amount of new loans for the same period in 2012 was £8.9bn, so there has been an increase in lending of almost £1.5bn (16%). This counters the argument that banks are not lending.

This is goo d news but the increase in new lending is being masked by an acceleration in repayment of debt. In the last quarter SMEs paid back £11.8bn, hence the fall in net borrowing (new loans less repayments) of £1.4bn. In the same period last year, repayments totalled £10.1bn, so we can see that the repayment of loan debt is accelerated.

The bottom line is that either banks are not lending enough in order to keep the total stock of net loans up or small businesses don’t wish to borrow; or maybe it’s a combination of both. We looked at the lack of appetite amongst SMEs to borrow in this blog, ‘Banks Are Right Not All Businesses Wish to Borrow’.

A combination of lack of appetite on both sides is where we are at, so we do need to maintain a sense of perspective as regards to how banks are performing. There will always be cases where specific businesses feel aggrieved by a ‘no’ but we need to be mindful that businesses have their part to play when it comes to the amount of money being lent out.

Remember, there are two sides to the lending/borrowing equation – bank supply, and business demand; the blame for falling lending does not currently lie with one party.

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