The Bank of England has issued a statement that confirms the five Project Merlin banks did not meet their collective commitment to lend £76 billion to small and medium sized businesses.

The bank’s data mirrors that of the banks and shows that lending to SMEs was 1.5% short of the target at £74.9 billion.

On the positive side overall lending to business at £214.9 billion did substantially exceed the £190 billion target.

Small businesses claim that they are being ignored by the banks while the banks place the shortfall in lending on a lack of true demand for such loans.

Stephen Gildert, EMEA head of SME lending for Experian, said ‘Demand for finance from creditworthy small businesses is subdued. There was a great deal of hunkering down and managing for cash throughout the downturn, and many of those now looking to invest are turning to cash reserves in order to fund growth ambitions. Flexible forms of finance are very much the flavour of the day for those that do want credit.’

Recent Experian research found:

  • 75% of SMEs asked said they had access to additional cash they could use for business.
  • 45% said they had enough cash reserves to expand and 19% had enough set aside for emergencies.
  • 23% said that they would look to take on more credit in 2012 but 33% were undecided.
  • Of those looking to borrow the first choice would be overdrafts (26%) and company credit cards (23%)
  • Only 8% of firms that had previously applied for commercial credit claimed that they have been unable to get it.

Anil Stocker, Director and Co-founder of MarketInvoice commented ‘Project Merlin figures released today reveal that banks have failed to hit their pledge to lend £76 billion to small businesses over the last 12 months. Banks collectively fell just over £1 billion short of the agreed target, with the state-backed RBS missing their quota by some distance. The failure of the banks to make good on the agreement adds weight to the argument that setting such targets for lending to SMEs is ineffective, and that the banks are no longer the most efficient mechanism for distributing capital to small businesses.’

He advocates more reliance on new innovative ways of lending instead of subsidising loans through the state controlled banks.

Neil Blake, senior economic adviser to the Ernst & Young ITEM Club commented: "We have been warning about the impact bank deleveraging could have on the economy for some time, but this is the first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis.

It's not a surprise that banks have been unable to hit the Project Merlin targets for lending to small firms and funding for small and medium-sized enterprises is likely to be particularly difficult to obtain going forward as banks seek to reduce credit risk. The average interest rate on smaller loans, of £1m or less, is already double that charged on loans of £20m or more, and we expect this trend to continue. As these young companies tend to be high-growth businesses, this will have adverse knock-on effects for economic growth.

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