Written evidence submitted by the British Bankers’ Association

[SME0110]

The BBA is the UK’s leading association for the banking and financial services sector, representing the interests of more than 240 member organisations with a worldwide presence in 180 countries. Our member banks make up the world's largest international banking cluster, operating 150 million accounts for UK customers and contributing over £50 billion annually to UK economic growth.

The industry is committed to maintaining a constructive dialogue with policy-makers and regulators over shared concerns to support businesses, help customers and boost the economic recovery.

This submission focuses on how the banking sector is supporting the growth of SMEs through access to finance and the Appeals Process, and how an increasingly competitive market will benefit businesses in terms of pricing and choice of products available to them.

1. Economic context

1.1.   Economic growth has continued strongly in recent quarters.  The recovery has been broad based and is being supported by a significant easing in credit conditions. The latest consensus forecast for 2014 has risen to 2.8%. GDP growth is now running close to 3 per cent (quarterly year on year) but still remains below its 2007/8 peak and around 15 per cent below its pre-crisis trend. 

1.2.   This encouraging economic data is welcome after a financial crisis like no other. The Bank of England’s decision to maintain the base rate at the record low of 0.5 per cent for the past five years demonstrates both the severity of the crisis and the fragile early stages of recovery. The BBA recognises that there were serious causes for concern over SME lending, however conditions are now improving. Availability of credit is rising, gross lending is increasing, and the pricing of finance is decreasing. These promising economic developments will be expanded on in the following section.

2. Access to SME finance

2.1.   The banking industry is committed to supporting businesses grow through providing finance to enterprises both large and small. Several datasets provide evidence that lending to SMEs is improving, and that businesses are confident that lending conditions will continue to be favourable. 

2.2.   Credit availability has improved, with the Bank of England’s Credit Conditions Survey Q4 2013 revealing that the overall availability of credit to the corporate sector grew strongly in the final quarter of 2013. Businesses are finding it easier to access bank borrowing and costs are falling due to competition between lenders. Demand for finance by businesses is recovering, with lending to medium-sized companies showing particularly significant increases. The graph below shows the increased availability of credit as outlined above.

Availability of Credit

Source: Bank of England

Demand for credit from small businesses was little changed in 2013 Q4, however demand from medium-sized companies increased significantly, as companies’ confidence and investment intentions edged higher. Lenders in the Credit Conditions Survey expected demand for credit to increase across all firm sizes in 2014 Q1, with significant increases expected for small businesses.

Demand for credit

Source: Bank of England

Demand for lending for capital investment has risen. There has been great concern that the economic recovery has been led predominantly by a rise in consumer spending rather than business investment. However, the Bank of England’s data provides evidence that the UK economy is starting to rebalance with demand for lending for capital investment up strongly.

Demand for lending for capital investment

Source: Bank of England

2.3.   The pricing of loans has also benefitted SMEs, as the Bank of England’s Trends in Lending – January 2014 reveals.

• SMEs are paying on average a rate of 3.45 per cent on their borrowings, the lowest since July 2011.
• The rate is slightly higher for smaller SMEs, at 4.43 per cent, although this is at its lowest since January 2011, and is down from 4.97 per cent in February 2013.
• Medium sized SMEs are paying an interest rate of 3.23 per cent, the lowest since October 2011.

2.4.   Charts 2.4 and 2.5 in the Bank of England’s Trends in Lending – January 2014 provide clear evidence that the cost of finance is falling.

2.5.   The FSB “Voice of Small Business” index confirms the Bank of England’s figures that credit conditions are easing. The survey finds that:

• The success rate of small businesses applying for credit rose from 42.2 per cent in Q4 2013 to 45.3 per cent in Q1 2014
• 13.5 per cent of respondents stated that credit availability was either good or quite good, up from 9 per cent in Q1 20

Proportion of small business successful in bank credit

Source: FSB Voice of Small Business Survey & Cebr analysis

The FSB “Voice of Small Business” also echoes the Bank of England pricing figures:

• 19.2 per cent of small firms are now reporting that credit is quite or very affordable, an increase from 13.8 per cent the same quarter last year
• 29 per cent of loans offered were under 4 per cent, compared to 21 per cent in the previous quarter

Indices of credit affordability / availability perceptions

Source: FSB Voice of Small Business Survey & Cebr analysis

2.6.           Gross lending rose in every quarter last year, with banks lending more than £10 billion per quarter in new lending to SMEs. The Bank of England’s Bankstats (Monetary & Financial Statistics) - January 2014 reveal that gross lending to SMEs began to rise in April last year and has risen every month for the past nine months year on year. Gross lending in January 2014 was 15 per cent higher than in January 2013. £7.1bn of new borrowing facilities were approved in Q4 2013, 26 per cent more than the same quarter the previous year, and reflected across all industry sectors and regions of Britain.

2.7.           Those who claim that banks are refusing to lend continue to quote net lending figures, which have remained negative for much of the past year. Net lending figures have contracted as firms repay loans and adjust their balance sheets. BBA figures show that in Q4 2013 SMEs repaid £5.8 billion worth of existing loans, whilst the use of overdrafts fell by £0.9 billion. In addition, a number of foreign banks withdrew completely from the SME lending market in the UK which has had an effect. However, these figures do differ by bank with a number showing that net lending has risen, as the Bank of England’s Funding for Lending Scheme usage and lending data publication - Q4 2013 reveals

2.8.           The BBA’s graph below demonstrates the growth of gross lending to SMEs.

Gross lending to SMEs

Source: BBA

2.9.           The above graph indicates the significance of the Funding for Lending Scheme, which has achieved its initial target of encouraging banks and building societies to boost lending to the UK economy. The latest Bank of England figures reveal that net lending to households and businesses by FLS participants in 2013 Q4 was £5.8bn.

2.10.       The scheme has helped to increase many banks’ net lending to SMEs, including challenger banks which are competing with more established institutions for their share of the SME market. However, the overall figures for business lending have taken an initial hit as some individual banks look to restructure their business models. Now that the scheme has been refocused on business rather than household lending, businesses will continue to benefit from the scheme throughout 2014.

2.11.       Whilst giving evidence to the Treasury Select Committee, Matthew Fell, Director of Competitive Markets at the CBI said that the Funding for Lending scheme “has had a positive impact – it would be difficult to judge what the situation would have been had funding for lending not been in place”. 

2.12.       Priyen Patel, Senior Policy Advisor at the FSB, stated that “the Funding for Lending Scheme has been relatively good in terms of its business side”. He noted that the average spread on loans was down by 0.8 per cent following the introduction of Funding for Lending, close to the FSB’s target of 1 per cent, adding that 70 per cent were within a two per cent spread.

2.13.       The latest SME Finance Monitor shows that in fact SMEs are far more likely to successfully apply for finance than they think:

• 50 per cent of respondents were confident that their renewal would be successful, compared to current success rates of 94 per cent
• 25 per cent were confident about a new facility, compared to a 46 per cent success rate
• During the lifespan of the Monitor, 7 out of 10 loan and overdraft applications have resulted in finance
• 79 per cent of SMEs interviewed said they did not seek external finance, nor did anything stop them from doing so
• Only 8 per cent of respondents rated access to finance as a major obstacle to their business - the lowest level since the Monitor began -  behind the economic climate (21 per cent), legislation (11 per cent) and cash flow and late payment (10 per cent)

3. Competition

3.1.           The banking industry is committed to encouraging competition within the sector in order to benefit the consumer through product choice and improved customer service.

3.2.           The Bank of England’s Bankstats (Monetary & Financial Statistics) - January 2014 reveal that over £170bn of loans and overdrafts were made to SMEs. BBA statistics show that the top 7 banks were responsible for £100bn of these, demonstrating that additional players in the SME financing market are giving businesses are greater choice of lender. This has been helped by the increased pace at which banking licences are being granted, providing greater competition to the more established banks.

3.3.           Levels of alternative finance are growing. Invoice discounting is growing at 20 per cent per year and peer-to-peer lending is growing at 100 per cent per year, according to the Asset Based Finance Association. The latest SME Finance Monitor reveals that 17 per cent of those interviewed used alternative sources of finance in Q4 2013, compared to 15 per cent in the same quarter of the previous year.

3.4.           However, UK businesses have a traditional overreliance on bank finance with banks providing nearly 80 per cent of all credit. For example, only 3 per cent of SMEs use equity finance in the UK compared to an EU-wide average of 7 per cent, far behind Denmark and Sweden where equity investment accounts for 46 per cent and 31 per cent of SME financing respectively.

3.5.           The banking industry, through its Better Business Finance programme is working with alternative finance providers to ensure businesses can get the right finance at the right time.

3.6.           Partnerships with institutions such as the UK Business Angels Association support start up and early stage companies. The bank-backed Business Growth Fund, provides fast growing businesses a capital boost of up to £10 million. To date, the bank-financed fund has invested nearly £250 million in British businesses across a broad range of sectors including energy, retail and hospitality.

3.7.           In addition the BBA and some of the major banks have launched a referral program with the Community Development Finance Association to give businesses that do not meet the credit requirements for bank finance the option to be referred to Community Development Finance Institutions (CDFIs). This is also now expanding to a pilot with the Start Up Loans Company.

3.8.           Each bank also has multiple bilateral relationships with brokers and accountants who are able to provide advice in assessing alternatives available to businesses. These lead to thousands of businesses being signposted to others to provide alternative support.

3.9.           A new “Finance Finder” – on betterbusinessfinance.co.uk gives businesses access to 500 finance providers across Britain, as well as the ability to compare and contrast business accounts.

3.10.       Furthermore, through mentorsme.co.uk and the bank mentoring programme, thousands of businesses are given vital support as they seek to develop and grow.

3.11.       The banks continue to work with government on support schemes to develop alternate (non-bank) sources of finance. Both in the Budget and the recent consultation on the Enterprise Finance Guarantee Scheme looking at how it could be extended to more specialist finance providers. The major four banks have agreed a voluntary protocol for handing deeds of priority and waivers to make it as efficient as possible for businesses seeking alternate finance. The industry also fully supports the sharing of credit data between finance providers - a practice banks have been engaged with for some time under the existing rules of reciprocity - and which will be further enhanced in the forthcoming legislation which the banks support. 

3.12.       The banking industry believes it is vital that businesses know the choices they have when seeking finance and that is why such so much has been invested in road-shows, clinics and roundtables in order to educate businesses on their range of finance options. These are usually undertaken in partnership with alternate finance providers and business groups and help businesses think about the differences between equity and debt, invoice finance and an overdraft, asset finance and term loans. Several hundred of such events have been held in these past 2 years and it is encouraging to see the understanding of the diversity of finance emerge, as also evidenced in the SME Finance Monitor .

3.13.       Finally, the UK banking industry is one of the most transparent in provision of lending data since the introduction of post code lending statistics in 2013. This offers a picture of what is happening where and when, and provides an opportunity for competition to thrive and evolve.

4. Appeals process

4.1.           The Independent Appeals Process was set up to enable any business with a turnover of up to £25 million which is declined finance by a participating bank, to appeal that decision with their bank. The application is then considered by another member of that bank’s staff who had no involvement with the original decision making process. Each participating bank has implemented its own appeals process in-line with a set of commonly agreed principles, overseen by Professor Russel Griggs OBE.

4.2.           Since its launch there have been almost 8,000 appeals made, with 37.5 per cent of these being upheld, largely as a result of more information coming forward. The Appeals Process has generated almost £40 million of funding to SMEs. For a list of participating banks, visit the Better Business Finance Appeals Process webpage http://www.betterbusinessfinance.co.uk/appeal.

4.3.           In Professor Griggs’ latest quarterly report on the progress of the Appeals Process, he states that banks are reacting positively to the process, and are all “progressing well with the Actions Plans we set them”.

4.4.           The report highlights a clear example of this, where there has been a ”continuing fall in credit cards and other specific banks where we felt that declines, appeals and then overturns were generally too high”, with Professor Griggs putting this down to process changes that have been put in place.

4.5.           In addition, Professor Griggs notes an improvement in the relationship between the customer and their bank. He finds that the whole Appeals Process has improved and enhanced the conversation between the two, and has acted as an educative tool so that both parties can fully understand why finance was either approved or denied.

5. Regulation

5.1.           Banks have an obligation to lend responsively to viable business.

5.2.           The banking sector is one of the most strongly regulated industries in the UK, with the twin peaks of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) as well as the Consumer Credit Act ensuring that banks’ actions are scrutinised at every turn. Proportionality of these regulatory activities is called for by many entrants seeking to develop in the SME market and it is encouraging that the PRA and FCA continue to work on options for such entities.

5.3.           It should also be noted that although certain products are not officially regulated, they are always supervised providing effective regulation. There is a danger that if all products become regulated on an individual basis, it would have a negative impact on customers as well as businesses as the choice of services available to them may be restricted.

6. Interest Rate Hedging Product (IRHP) Review

6.1.           The banks involved in the IRHP review are committed to finalising the review in these coming months and ensuring that all customers who were mis-sold products receive the right redress and recompense.

6.2.           The review is independently overseen by skilled persons under the strict guidelines laid down by the FCA.

6.3.           Banks have multiple thousands of staff working on the review and as the FCA has acknowledged the pace of it has enhanced in these past few months with over 6000 redress letters having been sent out. The review is set to complete in June 2014.

6.4.           The banks encourage all businesses affected to come forward and discuss their individual circumstances with the bank and the independent skilled persons so that the right outcome can be achieved for the customer and swift resolution made. 

6.5.           In addition, the banks fully recognise their responsibility to ensure customers understand the products being entered into and the banks continue to make sure customer facing documents lay out clearly the bank and client obligations as well as impacts on any change.

March 2014