EEF calls for greater competition amongst banks to improve business lending

31 August 2011

Lending conditions have begun to stabilise for Britain’s manufacturers, but the overall picture remains mixed with few signs that the flow of lending to business has eased significantly according to a new survey from the Engineering Employers' Federation (EEF). The third quarter survey of access to finance and cost of credit comes ahead of this month’s report from the Independent Commission on Banking. EEF used the results to call for greater competition amongst banks to improve business lending

EEF chief economist Lee Hopley

Commenting on the survey results, EEF’s Chief Economist Ms Lee Hopley (pictured) said: “The improvement in availability last quarter has now been accompanied by some easing in the numbers of firms facing a rise in the cost of finance. While conditions are slowly heading in the right direction the overall picture remains far from being as supportive as we’d like. There is clearly more finance available but the fact more companies are still reporting an increase in cost rather than a decrease suggests that firms are paying a price for it.

“With global clouds of uncertainty providing enough reasons for firms to hold off investment this is the time we can least afford to add any further constraints through tight conditions on accessing finance.”

According to the survey, a smaller proportion of companies reported a moderate or significant increase in the cost of finance from the second quarter (+17% from +25.3%). This has continued a steady decline since the severe conditions during the recession. However, despite this there are still more companies reporting an increase than those reporting a decrease (+17% compared to +5%)

Availability of finance has also continued to show a gradual improvement with fewer companies reporting a decrease in availability of new lines of borrowing (+7% from +10.9%).

However, despite some positive signs concerns still remain. In particular, the fees on existing lending show little improvement whilst the balance of companies that have seen the rates on existing borrowing go up has increased (+13.3% from + 12.8%). This is despite the Bank of England’s Monetary Policy Committee seemingly backing off any intention to increase Bank Rate from its record low of 0.5% in the short term.

In response, EEF urged the government to respond decisively to the forthcoming Independent Commission on Banking report by addressing the following key priorities:

- Committing to stronger competition in the UK SME bank lending market by following through on the Commission’s call for a greater number of Lloyds’ branches to be sold
- Looking seriously at impediments for SMEs (larger than micro) switching between banks, including the lack of difference between banks’ offers
- Improving sources of finance beyond the banking sector for growing SMEs, including equity finance and non-bank debt; for example, through extending the Enterprise Investment Scheme to debt
- Pushing for improving knowledge of real economy sectors like manufacturing in the financial sector where government could lead the way with its own schemes, such as the Enterprise Capital Funds.

Lee Hopley added: “A lack of competition in the SME lending market is still keeping costs too high and preventing the flow of finance our growing companies need. The government must respond strongly to the competition-enhancing recommendations in next month’s report on banking from the Vickers’ Commission.”