Banks are being offered an incentive to lend to businesses and homeowners in a new scheme launched by the Bank of England and HM Treasury.
The Funding for Lending Scheme (FLS) allows banks to borrow directly from the Bank of England at below market rates, at a time when the UK is experiencing the longest double-dip recession in over 50 years.
To incentivise banks to use the money to issue new loans and mortgages, for every £1 lent out, banks will be able to access an extra £1 reduced-rate loan from the scheme.
FLS will ultimately replace the National Loan Guarantee Scheme, which was launched in March.
Chancellor of the Exchequer, George Osborne is confident that the new scheme will help to boost lending to businesses and homeowners.
He said, “The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm.”
However Phil McCabe, senior policy advisor of Forum of Private Business believes that measures need to be taken to ensure the scheme helps those who need it most.
He told Growing Business, “There are signs that this fund is changing the banks’ behaviour – some are already using it to reduce mortgage costs, but only for low-risk borrowers not first time buyers, so clearly there remains a risk-averse attitude among mainstream lenders.
“There are concerns this culture will also persist in the small business lending market, and also that the benefits of the fund will stop at consumers and not reach the small firms in most need of it – it is important to monitor the situation carefully so we can prevent this from happening.”