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Lending to UK businesses remains weak

A study by the Bank of England entitled “Trends in Lending” has just been published. This shows that net lending to businesses has remained weak. The official data covers lending by all banks and building societies and shows that the monthly flow of net lending in March 2009 was “subdued, though positive.”  When looking at the three month annualised growth rate in Table 1A below, it can be seen that there is a marginal upward trend from 2.1% in January, to 2.2% in February, and reaching 2.6% in March. However, by contrast, the comparable figures for 2007 and 2008 were 19.4% and 10.8%. The 12 month growth rates shows a steady deterioration from 8.1% in January to 4.1% in March.

 

Lending Panel data, which is less reliable, shows in Chart 1.1 that the value of gross new corporate loan facilities provided by the major UK lenders fell in April after increasing in March. It also shows that gross new lending was more than offset by loan facilities which were removed or reduced.

Source: Bank of England

Source: Bank of England

 

Much of the reduced lending has been due to the depressed state of a number of sectors of the economy. A major contribution to the fall in the annual growth rate of lending has been due to the cutbacks in the commercial real estate sector, responding to the fall in the housing market. But wholesale and retail trade and manufacturing have also seen sharp falls in lending over the past year.

Lending to the commercial real estate sector has been depressed

Lending to the commercial real estate sector has been depressed

 

One positive note is that there has been more movement in the capital markets in recent months and some large companies have been able to raise more money through issuing new equity. On the one hand, this reduces the need for more expensive bank borrowing, but there is evidence that some of this new money has been used to pay off existing debts to the banking sector.

 

It is also noted that there have been sharp increases in fees and interest rate spreads for companies trying to raise fresh capital or to extend existing bank facilities. This is obviously going to make borrowing less desirable but for many companies they have no choice but to accept the banks’ terms or go under. This is particularly true of small and medium sized enterprises (SMEs). The recent picture shows that fewer SMEs are attempting to borrow money. On top of this, approvals of new borrowing considered as a ratio to applications, have fallen for smaller businesses.

 

This means that the banks are tightening up their lending criteria as they review their credit risks, with the effect that the flow of new loans has been considerably lower than in the same months of 2007. Not surprisingly, the use of overdrafts was higher in 2009 than two years previously, as firms became desperate to cover falls in cash flow. This, of course, is a relatively expensive way of borrowing, but perhaps the only outlet for many small companies.

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Posted in Banking, Manufacturing, Retailing, UK industry

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