Nine-Year Lending Low Forces Businesses to Cut Investment

Business lending lowest in 9 years - Weak bank lending could hinder economic recovery, says BoE chief - Business lending down to 7.9 billion in May, down from 12.6 billion in March - Squeeze on business lending has a knock-on effect for consumers MANCHESTER, England, July 3
MANCHESTER, England, July 3 /PRNewswire/ -- The Bank of England's (BoE) quarterly review of lending trends found that many firms are still experiencing the effects of the credit crunch, with business lending suffering its biggest drop in nine years.

Thinking Money highlights that net lending to private non-financial corporations also fell by 5.4 billion pounds in April - its biggest fall since June 2000.

Eight out of ten firms included in the Bank's survey reported that lending had become scarcer and more costly over the past year, while two thirds said that they responded by cutting back on investment.

Weak lending could delay economic recovery

Thinking Money vindicates the authority of the BoE report, which draws on long-established official data sources, such as the existing monetary and financial statistics collected by the Bank of England.

In the wake of the findings, BoE Governor Mervyn King warned weak bank lending could hinder the hoped for economic recovery.

"Banks' ability to finance a sustained recovery remains impaired by low levels of equity capital," he said.

The BoE's Deputy Governor Paul Tucker reiterated King's concern, saying the credit drought could tempt banks to hoard money until the dark clouds pass.

"If all banks were to adopt such a strategy, recovery might end up being anaemic at best, which would feed back into the banking system itself - increasing defaults and depleting banks' capital," Tucker said.

Thinking Money notes that the weakening of credit flows to cash-poor firms has taken place despite record low interest rates and a 125 billion pound asset-buying programme aimed at boosting the economy. It's for this reason why business credit card companies, such as MBNA, are increasingly likely to be the provider of credit to aid cashflow.

Scarcity of lending forces businesses to overpay

Businesses finding difficulty in sourcing bank finance are often forced to pay a higher rate for the finance they are able to secure, thus exacerbating existing cash-flow issues.

The BoE said that lenders report a fall in the average maturity of their loans to businesses, and also report that many businesses are negotiating "forward start agreements" under which they are able to extend their loan when it expires.

Knock-on effect for consumers

Thinking Money believes the squeeze on business lending has a knock-on effect for consumers, with consumer lending - credit cards and personal loans - having also fallen substantially in recent months and lenders resorting to retrenchments in order to recover losses.

The BoE report found that the quarterly rate of growth of unsecured lending was the lowest since 1992.

References
Thinking Money provides free commentary and analysis on economic and consumer financial news, providing help and advice.
http://www.thinkingmoney.org/
http://www.bankofengland.co.uk/publications/other/monetary/trendsinlending.htm
http://www.bankofengland.co.uk/publications/other/monetary/TrendsMay09.pdf
http://www.mbna.co.uk/business/

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SOURCE Thinking Money