Of course we are lending! Oh no you’re not!
Like the heading? Well it is Panto time of course (ours went very well since you ask) and it is nice to be seasonal occasionally, even if at times there is not much to smile about.
One area that is definitely causing frowns to form in a number of places is the subject of bank lending. “Banks must lend more” cry politicians and business organisations. “We want to lend and we are lending” say the banks. “Oh no you are not”, comes back the reply (see, this Panto lark is catching). And so the circle of claim and counter claim goes on.
So what is the truth? I recently went to a Surrey Chamber of Commerce event, where four representatives from each of the main high street banks braved the local professional services community for an enjoyable question and answer session. What became clear during the discussions was that there was a definite flight to quality, and businesses boasting good management teams, strong security and organic growth potential in attractive sectors were the ones they were looking to develop long term relationships with. There was an admission that there was limited appetite at present for smaller deals.
Although cash flow based lending was had been substantially reduced, banks were now looking to ensure they understood the cash flows in the business. There was a definite move away from traditional loans and overdrafts towards more asset based lending products, such as invoice finance. Covenants would be tighter, and these would be regularly monitored. They claimed that they had used the recession to get a lot closer to their clients.
The banks emphasised that they did want to lend, as that is their business. However they were finding that many of their clients were reluctant to borrow, even if offered a good opportunity, preferring where possible to pay down debt. Much of their recent “new” lending activity has often been refinancing and restructuring. However they said that the new Enterprise Finance Guarantee Scheme (EFG) was being used more widely than its predecessor, the Small Firms Loan Guarantee Scheme (SFLG).
On the thorny issue of pricing, they said that it was inevitable that spreads would increase, particularly compared to the current low Bank of England base rate, not least because the banks’ own funding costs were higher than this. Other factors currently influencing pricing were scarcities caused by the withdrawal of many foreign banks from the UK market, regulatory requirements, such as Basle II, and more focus on risk based pricing models.
The banks have been at pains to emphasise that their lending criteria have not changed and that they remain open for business. Anecdotal evidence however suggests that it is still extremely difficult to get money out of a bank for anything other than a “sure thing”.
This is not a “bash the bankers” piece as, in the main, the banks have been much more supportive of businesses battling the recession than they have been given credit for. Also, we probably don’t want to go back to the “cash machine” mentality that existed in those halcyon pre credit crunch days. However a little more pragmatism in bank lending in the current climate would be nice.
Antony Doggwiler
ajd@orchardgrowth.com