The Bank of England (BoE) said that its funding for lending scheme (FLS), currently due to end next January, will now run for an further 12 months to January 2015.
UK banks will be given greater incentives to lend to small and medium-sized enterprises (SMEs) and creditors other than banks will be able to participate. FLS, a lending scheme designed to provide funding for SMEs and households, has had limited success since its launch last August.
The scheme aims to encourage banks to lend by offering them cheap loans on the condition they pass them on to customers. BoE figures suggest banks took nearly £14bn from the FLS in the five months August to December 2012, although among participating banks lending was actually lower in the period than it was immediately before the scheme was introduced.
The Treasury said that the new incentive measures will encourage banks to lend more by allowing them to borrow an extra £5 from the FLS for every £1 they lend to an SME. Another incentive is that banks will be able to borrow £10 in 2014, when the scheme is extended, for every £1 they lend in 2013.
In its most recent policy meeting, the BoE’s monetary policy committee (MPC) said it saw merit in extending the scheme, as an alternative to a further bout of quantitative easing (QE).
Commenting on the news, Tracy Ewen, managing director of commercial finance company IGF Invoice Finance, said: “It is largely accepted that SMEs are at the heart of the growth of the economy. Making affordable credit available is absolutely crucial to help small and medium-sized businesses return to growth.” Although the extension of FLS indicated the government’s “positive intent and support, the scheme had so far had little impact on the criteria that banks stuck to rigidly when lending to SMEs and this was unlikely to change.
“Many struggling businesses can’t access these new, lower rates, and still will not be able to going into 2015. It is important that SMEs start looking to alternative sources of funding, such as invoice finance, where they can obtain tailored advice and funding to help them grow.
“Certainly, this is a step in the right direction, but if growing SMEs are going to contribute to improvements in the economy and aid a move out of the recession, the government needs to do more to ensure their long-term success.”
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