Banks Cut Back On Loans Despite FLS Extension

Bank Loans To Business Falls

It has been reported that UK bank lending has continued to dwindle, despite government attempts to reverse the trend through the introduction of the “Funding for Lending Scheme” (FLS).

Bank of England (BoE) data showed that overall net lending fell £300 Million (GBP) in the first quarter of 2013. Lending to individuals was up, but loans to businesses, including landlords with rental property portfolios was down.

The figures are an improvement on the last three months of 2012, when bank lending fell by £2.4 Billion (GBP).

The Bank also said that banks taking part in FLS would make more loans available later this year.

The Funding for Lending Scheme (FLS) was launched in August 2011, in an attempt to boost lending and get the nation’s economy going again. Under the scheme, banks and building societies are allowed to borrow money cheaply from the Bank of England, providing they loan that money to individuals or businesses. When FLS was launched, the government said it expected that up to £70 Billion (GBP) would eventually be made available, and recently the scheme was extended to run for an additional 12 months until January 2015.

The Bank of England said that banks had borrowed an additional £2.6 Billion (GBP) under the scheme in the first quarter, taking the total amount that has been made available so far to £16.5 Billion (GBP).

Paul Fisher, the Bank of England’s Executive Director for markets said: “The picture of flat lending growth overall is broadly as expected at this stage, reflecting reductions in some legacy portfolios being roughly offset in aggregate by expanding new lending. I expect new lending to pick up further through the rest of 2013”.

Some banks and building societies have increased their loans. Barclays and Nationwide were among the lenders to increase their loan book, while RBS, Santander and Lloyds reduced the amounts they lent.

In a statement issued after the Bank of England’s figures were released, a spokesman for RBS said “RBS has increased lending to the real economy by nearly £1 Billion (GBP) in the first quarter of 2013, which includes a £600 Million (GBP) increase in our business lending, our strongest performance since the scheme launched.”

Lloyds Banking Group said the reduction in its lending was as a result of running down the non-core parts of its business, prior to splitting its amalgamated banking interests into separate divisions.

The Bank of England said the latest figures reflected the continuing trend of an improvement in lending to individuals, but a decline in lending to businesses.

One reason for this was that some lenders had reduced their exposure to commercial property, which makes up a significant proportion of their lending. The BoE also said that most of the reduction in loans was down to three big lenders (RBS, Lloyds and Santander) who were cutting back as a result of the financial crisis, or in order to qualify for state aid.

John Longworth, the British Chambers of Commerce (BCC) Director General, which represents over 100,000 businesses in the UK, expressed disappointment with the figures, saying:”It is a concern that lending continues to contract despite the Funding for Lending Scheme having been in place for nearly a year. The real test for Funding for Lending is whether it is able to get credit flowing to young and fast-growing businesses. Unfortunately many of these growth firms are still being left out in the cold.”

Anthony Browne, Chief Executive of the British Bankers Association (BBA) said “Many businesses do not want to borrow at the moment, often because they prefer to pay off debts first. Businesses currently have over £15 Billion (GBP) of borrowing available that they are not using and are sitting on cash reserves of nearly £126 Billion (GBP) almost 6% more than a year earlier. As today’s figures show, there should be no doubt that now is a good time for businesses to go and see their bank if they want to borrow. If you run a business with a good business plan and want funding, our message is apply to your bank.”

That is a great statement from the BBA but does it apply to landlords?

Landlords with a sound business plan, bank accounts that are always in credit, a proven track record of operating a successful property rental business and who can demonstrate that they have the necessary systems and procedures in place to deal with all eventualities may get finance from banks, it may appear to be having to jump through hoops, but it is possible.

However, asking the bank manager for a loan to expand a rental property portfolio without implementing financial safeguards such as Rent Guarantee insurance or having comprehensive Landlord Buildings Insurance, will be pointless. Landlords need to ensure that they do everything possible to prove to the bank that any financial investment can and will be repaid, and that there are systems in place to ensure a steadyand reliable rental income.