The level of bank lending to businesses fell significantly in January, Bank of England figures have revealed.
According to the Bank’s latest Trends in Lending report, net lending to UK businesses fell by £6.5bn in January, compared to a fall of £3.4bn in December, bringing the 12-month drop in the growth rate of the stock of loans to -9.3%, the lowest level since monthly records began in 1999.
The publication said major lenders have reported that lending remained weak in February, but less so than in January.
The report said that the drop in net lending was partly due to reduced demand for new lending from businesses, who are increasingly seeking to reduce their borrowings and repay loans.
The Bank of England said lenders have reported that smaller companies, like businesses overall, were seeking to reduce debt levels, though smaller firms would remain more reliant on bank finance than larger companies whose access to capital market finance was greater.
A separate survey on lending to small and medium-sized firms by the Department for Business, Innovation and Skills (BIS) highlighted a flat profile for new lending compared to a rising profile for repayments. Repayments during 2009 were 17% greater than in 2008, which BIS said signalled a more cautious approach to lending generally.
However, the report also said that: “Contacts of the Bank’s Agents have continued to report elevated fees on new lending.”
Philip White, chief executive of independent finance provider Syscap, said the fall in net lending was “disappointing, but not that surprising”.
“With both the arrangement fees rising and the interest rate which SMEs are being charged increasing it would be strange if demand was not suppressed,” he said.
According to BIS, more than three quarters of loans to small and medium-sized businesses arranged in 2009 were subject to arrangement fees, compared to 59% in 2007.
The Bank of England report said that 'contacts' had also reported that the overall availability of credit had continued to improve in January, though more so for larger businesses than smaller ones.
White added: “The availability of credit has improved much more rapidly for larger businesses, due no doubt in part to the fact that billions was spent by the Bank of England on corporate bonds issued by those larger businesses through their Quantitative Easing scheme.
“In comparison, the Bank of England has not yet invested anything in debt issued by small and medium sized businesses – despite promising it would.
“The problem with this is that it means that even many profitable SMEs are not daring to invest properly in their own businesses. Not only does this hinder the economy’s recovery in the short-term, but in the longer term a low level of investment in business assets will undermine the UK’s international competitiveness.”
© Crimson Business Ltd. 2010