Written evidence from the British Bankers Association (ATF 52)
INTRODUCTION
- The BBA is the leading trade association for the UK banking sector with 200 member banks headquartered in over 50 countries with operations in 180 jurisdictions worldwide. Eighty per cent of global systemically important banks are members of the BBA. As the representative of the world’s largest international banking cluster the BBA is the voice of UK banking.
- We have the largest and most comprehensive policy resources for banks in the UK and represent our members domestically, in Europe and on the global stage. Our network also includes over 80 of the world’s leading financial and professional services organisations. Our members manage more than £7 trillion in UK banking assets, employ nearly half a million individuals nationally, contribute over £60 billion to the UK economy each year and lend over £150 billion to UK businesses.
- The BBA welcomes the opportunity to provide written evidence to the Business, Innovation and Skills Select Committee on Access to Finance.
- The banking industry is committed to maintaining a constructive dialogue with policy-makers and regulators about our shared objective to support businesses, help customers and boost the economic recovery.
- This submission focuses primarily on how the banking sector is supporting the growth of SMEs through access to finance.
- The BBA membership provides products and services to businesses of all types and sizes. However, unless otherwise indicated, the bulk of the comments in this response concern debt finance for SMEs which were the primary focus of a range of policy initiatives since the onset of the financial crisis in 2007. In addition, evidence and commentary has also been included on some related funding market developments, notably on referrals.
EXECUTIVE SUMMARY
- SME credit conditions have improved significantly since 2010 with most businesses reporting confidence in their ability to raise funds if needed both now and in the future. In the 18 months to September 2015, 80% of all SME credit applications with banks were successful (compared with 68% in the 18 months to September 2013).
- This improvement has been reported alongside a sustained period of economic recovery and low interest rates. A number of new and emerging competitors have emerged since the last recession to enhance the SME finance environment. However, BBA members have also played a full part; banks have provided about two-thirds of the increase in gross funding for SMEs between 2010 and 2015. Banks support many firms seeking to grow with a range of financial services including, where appropriate, debt finance. A number of specialist growing business services are offered as well and many of the larger UK banks have also fully capitalised the Business Growth Fund (BGF) with £2.5 billion of funds. So far, the BGF has invested about £650 million in long term capital into 100 UK firms; it is the largest long-term equity investment company supporting SMEs and mid-cap businesses in the UK.
QUESTION: HOW HAS THE FUNDING LANDSCAPE CHANGED SINCE 2010?
9. Economic context
9.1. Economic growth has continued strongly in recent quarters, albeit at a slightly lower rate than in 2013/14. The recovery has been broadly based and is being supported by a significant easing in credit conditions. GDP growth in Q4 2015 was still running close to 2% p.a. (quarterly year on year). The latest consensus forecast for 2016 has risen to 2.3%.[1] Economic growth rates still remain below those of 3.5% to 4% p.a. reported in 2005/6 in the run-up to the onset of the last recession. However, the business cycle has moved some way past the low point of the recession into a sustained recovery phase. The Bank of England’s decision to maintain the base rate at the record low of 0.5%for the past five years demonstrates both the severity of the last recession and the fragility of some aspects of the current recovery, notably in the international arena. Nevertheless, the economic progress achieved since 2010 should be recognised and the impact this has had on the wider business environment on issues such as profitability and creditworthiness.
9.2. The BBA recognises that adverse economic conditions impacted both supply and demand for SME lending, especially in 2010-2013. However, conditions in both respects are now improving. Availability of credit is rising, lending is increasing on both a gross and net basis and the pricing of finance is decreasing. These promising economic developments will be expanded on further in following sections
10. Access to SME finance
10.1. The banking industry is committed to supporting businesses growth plans through providing finance to investment ready enterprises both large and small. Credit availability - linked to the creditworthiness of borrowers and the wider economic climate - has improved. As economic recovery has become entrenched the evidence from several datasets is that lending to SMEs is more accessible now than in 2010-2013 and that businesses are confident that lending conditions will continue to be favourable.
10.2. The recent trend in the flow of new funds to SMEs in the UK is summarised in Figure 1. Since 2010 the annual gross flow of new funds - excluding primarily working capital facilities - has increased by over 50% to exceed £77 billion a year. Within this total, all the main originators of new funds have reported growth, although some of the newer and alternative funders have grown from a very low base and consequently reported spectacular year-on-year growth.
10.3 Turning specifically to bank sourced loan funding, the industry has played a full part in this revival in SME funding. Banks provided about two-thirds of all the increase in origination to SMEs between 2010 and 2015. The recovery has occurred against a background of significant regulatory change in the sector. Also, additional lending has been encouraged by a succession of industry-government initiatives starting with Project Merlin in 2010, combined with a rebound in economic growth.
Figure 1: Gross New Funding for UK SME’s, 2008-2015
Figure 2: Business Finance landscape – SME Finance Monitor “Then and Now” [2]
*Note: “Then and Now” relates to data collected at the start of the survey in 2012 compared with the latest data. However, the survey covers SME bank credit experience from about 2010 onwards even though data was not collected until 2012
10.4 The latest SME Finance Monitor for the year to September 2015 – an independent survey by BDRC points to a number of important recent developments, highlights include:
- The use of external finance amongst SMEs has begun to stabilise after a period of decline lasting several years. This is particularly evident in the use of “core” banking products (loans, overdrafts and credit cards);
- Although the number of Permanent Non-Borrowers (PNBs)[3] in the SME population remains higher than before the onset of the recession, research suggests this is increasingly a deliberate choice. Such a decision is supported by high levels of business deposits that continue to grow, reducing SME needs for bank finance. Deposit levels are growing by 8% annually and substantially exceed SME borrowing, by more than £60 billion. A recovery in profitability in the SME sector has also been followed by a fall in the number of firms reporting the need to inject personal cash funds into the business;
- Amongst the firms that do approach a bank for finance, the overwhelming majority receive funding; in the 18 months to Q3 2015, amongst those that applied 80% were ultimately successful (higher than the 68% success rate reported in the 18 months to Q3 2013);
- Despite these overall positive developments, some types of proposition are sometimes less easy to support, notably start-ups and first time borrowers. The banking industry continues to look at ways to support these firms in conjunction with other partners, the Government and the British Business Bank, as well as - when appropriate - measures to increase awareness of borrowing capacity.
10.5 Overall, the picture of generally improving trends in the debt funding environment for SMEs has been acknowledged by the Bank of England; the Q3 2015 Credit Conditions Survey commented that SME credit availability “was approaching normal”. However, this view also recognises that normality is not the same as a return to pre-recession, acknowledging the impact of wider market and regulatory developments. Nevertheless, official data still illustrates that – despite a long term trend of declining overdraft usage – even the net flow of bank lending to SMEs is increasing once again. At the end of 2015, the total stock of bank lending to SMEs (loans and overdrafts combined) was 1.2% higher than a year before. [4]
Figure 3: Net SME Lending (12 month growth rate)
11. Global Comparisons
11.1 An assessment of the UK’s competitive position in the provision of finance to SMEs is made difficult by a lack of comparable data. The most often cited survey is the World Economic Forum’s annual review of global economic competitiveness which currently ranks the UK in 9th position overall but falling to 15th on the specific topic of financial services and credit. However, recently the UK’s position has been impacted heavily by a loss of public confidence in banks during the last recession (the current UK rank for public confidence measure is 89th in the World), underpinning efforts of the industry supported by policies of successive governments to reform and build confidence. The survey results also support the use of state guarantees to encourage more unsecured lending for viable businesses.[5]
11.2 A more detailed and up-to-date comparison on SME financing is available for OECD countries and within the EU, although even here some data issues remain. The OECD 2015 survey - still based on end 2013 data – reports a gradual improvement in the SME funding environment with the UK performing better than many other markets. [6] More up-to-date is a comparison between the European Central Bank (ECB) survey and the UK SME Finance Monitor, both based on similar SME business surveys. This suggests that the environment for UK SMEs access to external finance is better than in the Euro area overall. Looking specifically at access to finance as a major obstacle for growth, the UK SME Finance Monitor (Q3 2015) reported this as an issue for 7% of firms, while the ECB’s equivalent SAFE data (end H1 2015) cited 11%. The UK result was on a par with Austria, Finland and Germany, the best performing countries in the eurozone on this issue.[7]
QUESTION: WHAT HAVE BEEN THE MOST SUCCESSFUL GOVERNMENT POLICIES TO ASSIST GROWING COMPANIES?
12.1 Since 2010 successive governments have introduced a number of policies and interventions to support the banking sector in its efforts to encourage lending and economic recovery. In many cases, these actions were specifically targeted at the SME sector and some have assisted firms to grow.
12.2 There are a large number of government schemes aimed at helping businesses across the spectrum to obtain finance. These include the Funding for Lending Scheme (FLS) and the interventions that now fall under the remit of the British Business Bank. The latter includes the Enterprise Finance Guarantee (EFG), Start-Up Loans scheme and The Investment Programme. The British Business Bank has also recently launched the Help to Grow pilot to facilitate lending of between £0.5m and £5m to growing firms.
12.3 It is difficult to attribute improvements to specific policies but, as illustrated previously, they have collectively underpinned a revival in the supply of funding to SMEs on both a gross and net basis, notably when combined with economic recovery
QUESTION: WHAT ARE THE MAIN IMPROVEMENTS OR INTERVENTIONS?
13.1 Looking specifically at the issue of growing firms, the BBA and the larger high street banks are particularly supportive of the work of the Business Growth Fund announced in late 2010 as part of the discussions leading to the Business Taskforce Report and the Merlin Agreement.
13.2 BGF is owned by its shareholder banks: Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered. Together they have provided funding for all investments made to date and confirmed their willingness to provide total funding of up to £2.5 billion, making BGF the largest long-term equity investment company in the UK providing support for expanding larger SMEs and mid-cap businesses. The BGF was set-up as an independent operation by early 2011, although all banks work with the BGF at a client level. This work also complements dedicated growing business or business growth programmes operated by many individual banks.
13.3 By the end of 2015, the BGF with bank shareholder support had invested £650m of long term capital into about 100 growth firms (including £257m to 28 firms in 2015 alone). In October 2015, BGF launched a dedicated early stage technology venture fund, making its first investment of £3m before the year end.[8]
13.4 The work of the BGF and other schemes illustrates the benefits of market-orientated policies to enhance the SME funding environment, especially for high growth SMEs. As a result, UK banks strongly endorse the approach of the BBB in targeting intervention to market gaps. The activities of the BBB are largely complementary to existing funding environment for SMEs. In some cases, such as the EFG, it is appropriate that banks are major BBB partners. However, banks have limited ability to provide equity (or quasi-equity) funding so it is correct that the bulk of the BBB’s work is outside of the mainstream banking sector.
13.5 Indeed, the growing recognition of the need to develop new and more extensive sources of asset-based and equity funding for SMEs and mid corporate firms has been a welcome development amongst both policy makers and practitioners alike in recent years. According to the OECD, non-debt sources of SME funding are used more often by many global competitors, including other EU countries, than in the UK.[9] Achieving the goal of ensuring that current and future periods of enterprise expansion and economic growth are supported by appropriate finance should help avoid the repetition of some of the issues than emerged in business funding post 2007. Appropriate funding is often not debt finance and banks have a strong interest and a role to play in encouraging the growth and take-up of these alternative sources of expansion funds.
13.6 Even though banks may not be the source of appropriate finance, they still have a wider role to play in assisting firms to access this funding. This is the focus of a lot of the current industry wide initiatives such as the provision of enhanced credit data and the roll-out of a national SME credit referral scheme, both introduced in the Small Businesses Enterprises and Employment Act, 2015 and subject to secondary regulations that were placed on the statute books on 1st January 2016.[10]
13.7 The Finance Platform referral scheme will allow in many circumstances SME customers who have been unsuccessful in seeking funding from a current bank provider to be offered a referral to a potential group of alternative providers. This should include some growing firms who find mainstream debt funding difficult, especially on serviceability grounds.
13.8 However, it is important to recognise that, even after the full roll-out of the referrals portal as well as other initiatives to promote supplier diversity and competition, not all SMEs will receive finance. This is sometimes expressed as a “funding gap” - estimates for which are wide ranging and difficult to construct. Estimates range from a few hundred million a year to in one case over £30 billion. If it were in the region of £5 billion a year in the current market environment this would be equal to 8% of current market supply rates.[11] However, only a portion of this gap may be addressable by debt providers, primarily through improvements to the financial capabilities of business borrowers.
13.9 The continuation of the funding gap will be a consequence of the market based approach and the emerging regulatory environment for financial services. For example, the new referral portal(s) will all be operated in a commercial environment and will work in a similar way to existing accountants and credit broker networks, albeit on a more comprehensive basis. Businesses with the greatest commercial opportunity will always be prioritised in this process and regulation will put a brake on risk appetite for some market participants more than others. This could still include some growth firms which have yet to reach a sufficient stage of development to service finance costs; indeed, they may still be too risky for fully open market equity funds.
13.10 Consequently, access to funding will never be comprehensive for all growth firms without ongoing specialist programmes with public support. A similar outcome will be evident for funding start-ups or business ventures without collateral or a track record. Specialist schemes include the Start-up Loans Programme, the EFG or similar first loss guarantee programmes, as well as support for equity investment such as VCTs and the EIS. Despite a raft of policies to enhance the market environment, a role for some degree of public intervention for both economic and social policy reasons will remain over the medium term.
14. Further BBA work on Access to Finance
The BBA and its member banks remain committed to promoting and developing the environment for business finance in the UK working with a range of public and private sector partners at both national and local levels. A key strand of work in 2016/17 will be an update to the report of the Business Finance Taskforce in 2010.[12]
11 February 2016