BoE to boost Funding for Lending scheme by £80bn

The Bank of England’s monetary policy committee today revealed changes to the £80bn Funding for Lending scheme, boosting the supply of cheap credit to small businesses.

UK Chancellor George Osborne has unveiled plans to inject £80 billion ($120 billion; €93 billion) into the UK treasury’s cheap credit scheme, in a bid to expand the Funding for Lending Scheme (FLS).

The Bank of England (BoE) will make the funding available to asset-based lenders, invoice finance houses and leasing firms in an attempt to ease the credit crunch still being felt by SMEs.

In addition to boosting confidence and investment, the announcement serves as a response to the GDP figures released last week, broadly showing that the countries grew by 0.1 percent in the first quarter.

Ian McCafferty, part of the BoE’s Monetary Committee, believes “the FLS has helped to reduce the cost of funding for UK banks…the main impact has been seen in the mortgage market, where availability has risen and loan rates have come down,” he said in a BoE statement.

However, while the FLS is considered to have succeeded in the mortgage market, some industry participants have criticised the FLS for being broadly inefficient in helping lenders (specifically banks and building societies) reduce the price of new loans and increase their net lending to individuals and corporates.

“In fact, it has even failed to have much impact on SME businesses,” a London-based debt fund manager told Private Debt Investor.

According to figures released by the BoE, just 11 lenders made use of the scheme in the fourth quarter of 2012, drawing down £9.5 billion. Although there are now 39 participants in the scheme – which accounts for 80 percent of lending to the ‘real economy’, according to the Bank of England – only 14 have so far made use of it, based on the figures. These include Barclays, Nationwide Building Society, Santander Lloyds Banking Group, and state-owned RBS, among others.

“We do not agree with some commentators that this is evidence that the FLS is not working…it is too early to judge the full effects of the FLS on bank lending volumes,” said McCafferty.

In the fourth quarter of last year, net lending by FLS participants fell by £2.4 billion. Since the scheme launched in June last year, net lending is down by £1.5 billion.

“Early signs have been encouraging, as funding costs for UK banks have fallen sharply,” the BoE said in its quarterly report. “But it will be some time before the impact of the FLS on lending is clear. The Bank is monitoring a range of indicators in order to assess the direct and indirect impacts of the scheme.”