Labour have poured billions of pounds into a bank bail, but still businesses can’t borrow the money they need – by Julian Brazier MP

jb2I have just had another letter from a sound small business whose bank will not extend a loan to them to facilitate normal operations. Trading is difficult, but what makes conditions worse is the unwillingness of many banks to lend to businesses, where there is any risk at all. Some bank managers have even been treating their customers aggressively, for instance by changing the terms of their loans or overdrafts at a moment’s notice and without any consultation.

The Government has paid out tens of billions of pounds of taxpayers’ money to bail out many of our banks. But traders are reporting that they are still waiting for signs of improved liquidity from the banks. Such reluctance to lend threatens the livelihood of many in the small business sector. Banks must behave responsibly and help prevent a large number of small businesses from becoming insolvent or they will lose their customers and recession will turn into a slump.

The problem is that the Government’s huge package has been constructed in such a way that banks have an incentive to pay off their debts as quickly as possible and so get their loan books down rather than up. A quick examination makes it obvious why. The government money has been lent at 12%, when interest rates are on the floor, so banks are focusing on paying off the government, not lending to customers. (The equivalent US package was priced at just 5%)

Ironically one of the Treasury ministers, in a question session in the House, tried to head off the argument by praising a new initiative by Barclays to lend to small businesses. The initiative is welcome but small scale. The key point is that Barclays is one of the few banks that kept out of the government scheme.

That is why David Cameron has proposed a government-backed small business loan guarantee scheme and George Osborne has said we must look again at the structure of the bailout package. The latest government announcement remains unclear. It is all very well to provide an emergency transfusion to prevent the financial system from collapsing but there is little point if the lifeblood does not reach small businesses.

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