Spotlight on….the new Funding for Lending Scheme

The new Funding for Lending Scheme (FLS) was launched by HM Treasury and the Bank of England in August 2012. It aims to boost lending from banks and building societies to UK households and non financial companies.

Why is the scheme being launched?
Continued turbulence in the Eurozone has revealed severe vulnerabilities in the European banking system, which has also affected the UK financial system. In this climate, banks have become increasingly risk averse with business lending decreasing. The Bank of England has introduced FLS to provide banks and building societies with a lending incentive. The aim of the scheme is to increase bank lending by approximately £80 billion. The FLS replaces the previous ‘National Firms Loan Guarantee Scheme’ and is open to a wider range of businesses.

How will it work?
Until the end of January 2014, the Bank of England will allow banks to borrow funds from it, at discounted rates. The intention is that the banks will then pass this on in the form of cheap loans to households and businesses. The banks that join the scheme can initially borrow up to 5% of their current lending total. The bank will be charged interest at a discounted rate of 0.25%. If a bank subsequently increases their overall lending they can borrow more than 5%. If they decrease their lending levels, then the interest rate the bank has to pay can rise to 1.5%.

Which banks and building societies are in FLS?
At the time of writing this article at the end of November, it is reported that there are 30 UK lenders who have signed up to the FLS. The banks signed up include Barclays, Lloyds Banking Group, RBS, Santander, Virgin Money, Tesco Bank and Clydesdale Bank. HSBC is currently not in the scheme.
The banks and building societies involved at the moment represent around 80% of lending in the UK economy.

What is the response to the FLS so far?
It is hoped under the new scheme that banks will be more receptive to start ups and smaller businesses looking for lending. There has, however, been a mixed response to the scheme so far. There are some who believe that the banks will increase lending to business. However, others point out that under the new scheme there is nothing to say the banks will use their newly borrowed money to lend to more high risk businesses, even if these businesses have growth potential. There is also the fear that banks can use the cheaper funding to provide reduced rates to existing customers, rather than increase lending to new customers. In terms of the mortgage market, early indications show that the FLS is proving to be effective with the number of mortgages for house purchases increasing in September and October 2012. The British Bankers’ Association has said the number of house purchase approvals in October were at the highest number since January 2012.

Commentators are now reporting that the FLS may be damaging the UK economy as it is prompting lenders to lower interest rates paid to depositers. This is because the FLS initiative makes banks less reliant on savers’ cash so they don’t need to offer such competitive rates.

Summary
Whatever the impact of the new FLS, it is true more so than ever that in making a case for bank (or other) lending you must make sure you have a well thought out, clear business plan with supportable forecasts and other up to date financial information.

If you have any queries on this article or on bank funding/business plans/forecasts in general please contact Carol Flockhart, Business Support Partner by email to carol.flockhart@chiene.co.uk