Friday Letter: A helping hand

The UK government’s initiative to compel banks which decline loan applications to introduce those would-be borrowers to alternative lenders is a welcome boost for the private debt industry.

A week after the Irish government announced plans for new regulation geared specifically towards the private debt industry, the UK Treasury has followed suit with its own initiative.  

Following a period of consultation earlier this year, the UK’s Chancellor of the Exchequer George Osborne this week announced plans to enact legislation that will compel banks which decline loan applications to pass on details of the potential borrower to a platform that can be accessed by alternative lenders.  

So is this a good idea? Undoubtedly. One could argue that it’s somewhat disingenuous to suggest private debt funds will be clamouring to feed on the scraps thrown to them by the leading banks.  

But to suggest that companies whose loan applications are rejected by traditional lenders are all basket cases is unfair – many simply don’t conform to the stricter risk metrics banks have adopted.  

Yes, there will be the odd company at whose application even the most daring lender would baulk, but many companies are turned down by banks for a whole raft of reasons. There will be numerous high quality businesses who simply don’t appeal to a bank from a lending perspective, simply because of their much-reduced appetite for risk.  

The government’s proposal is also an innovative way of addressing what the Treasury’s report called “the market failure of imperfect information”. The majority of SMEs only ever apply for finance from their relationship bank – they don’t realise there are other types of lender out there. And those alternative lenders might well be unaware of that company’s existence or need for financing.  

So a mechanism which draws those companies to the attention of private lenders is to be welcomed, not least because it reduces the already very onerous burden on direct lending funds when it comes to originating deals. Origination is perhaps the biggest challenge such funds face, and is often cited by those sceptical of the direct lending model.  

Unsurprisingly, alternative lenders have been quick to praise the proposals. Edi Truell, chief executive of Tungsten Network, was one to do so. “We welcome George Osborne's initiative to improve access to finance for small businesses. According to the Bank of England, the growth rate in the stock of lending to SMEs has been negative for the past four years across a range of measures. One of the core reasons for setting up Tungsten Bank was to help businesses access much-needed finance.” 

There are some practicalities still to be thrashed out – how much information should be passed on, who should be compelled to do so (the government suggests only the largest lenders will be subject to the new legislation), and which types of finance applications should fall under the proposals (the remit is likely to grow beyond just loans to include other types of financing).  

But the proposals are progressive, and necessary. The UK’s four largest banks account for 90 percent of business lending, for example, and few would argue that the British market, like the European one, is over-banked. As Europe gradually shifts towards a more balanced US model where banks and institutional lenders compete on a more equal footing, any governmental initiative which aids and accelerates that process is to be applauded.