The Funding for Lending Scheme (FLS) will operate for a further year, the Bank of England says, as part of its efforts to provide finance for small and medium-sized businesses (SMEs).
First set up in August 2012, FLS was created to reduce the cost of lending for banks and building societies and increase the incentives for doing so.
It is also hoping to include lending involving non-bank providers of credit, a market which the Bank of England says plays an ‘important role’ in providing finance to the ‘real economy’.
Sitting alongside the one-year extension, incentives to boost net funding will be ‘heavily skewed’ towards SMEs. For every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme in the extension period.
Furthermore, to encourage banks to lend to SME’s sooner, every £1 of net lending to SMEs during the rest of 2013 will be worth £10 of initial borrowing allowance in 2014. Net lending to other sectors during the remainder of 2013 will count towards the initial borrowing allowance for 2014 pound for pound.
The Bank of England is also counting lending by banking groups involving financial leasing corporations and factoring corporations going forward.
More on Funding for Lending scheme:
Chancellor George Osborne says, ‘This is a big boost for the SMEs that are at the heart of the British economy.
‘The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for SMEs so that they can play their full part in creating new jobs.’
Lending by banks in the UK has recently come under fire after it was found that net lending dropped by £2.4 billion in the fourth quarter of 2012, the first period when the impact of FLS would have been noticed after its August 2012 foundation.
Commenting on the scheme’s extension, Syscap CEO Philip White says, ‘We are really pleased with these developments. The flaw in the FLS was that there was no specific incentive for banks to use the scheme to increase lending to SMEs rather than to big companies.
‘The scheme also overlooked that really vitally important flow of funds from banks through independent leasing companies and on to SMEs.’
Adam Tavener, chairman of Clifton Asset Management, parent company of Pensionledfunding.com, adds, ‘The banks themselves have warned that this extension will not clear the credit bottleneck on its won and it is our view that this further inducement to pass on the benefits of subsided lending to SMEs will only have a marginal effect.’
