Although the whole agreement between the UK government and the major banks on lending to business, Project Merlin’ is broadly on target, lending to small and medium enterprises (SME) is falling short.

Under Project Merlin the UK’s major banks (Barclays, HSBC, Lloyds Banking Group, RBS and, in the context of lending, Santander) agreed to lend out a total of £190 billion to business over 2011, which is £47.5 per quarter on average.

By the end of the third quarter this stood at £157.7 billion compared to the required £142.5 billion.

But within the overall target the banks were also meant to lend £76 billion to SMEs. That is £19 billion a quarter, which at the end of quarter three should have stood at £57 billion.

However the total for SMEs to the end of Q£ stood at £56.1 billion.

So, although the banks only need to lend out £32.3 billion in this final quarter to meet their overall target the lion’s share, £19.9 billion, would have to be made to SMEs to meet all targets.

But what comes first, the lending and debt or the recovery?

When the banks lend to SMEs they are making a business decision based on the likelihood of getting their money back.

As the economy looks more and more likely to technically re-enter a recession that it never really left the banks are put in the position of meeting government targets and possibly losing money as companies default or making sound business decisions and missing those targets. For them lending and debt obviously does not automatically mean growth these days.

One thing to bear in mind is that if there was money to be made in lending to SMEs then it would be happening if, of course, the sound SMEs are actually asking for the loans in the first place, after all the banks do say that business demand remains weak.

In these difficult times the old adage of only lending to those that don’t really need it probably never rang truer.

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