Darling begs banksters over small business loans

The FT reports:

Alistair Darling is pressing banks to change their voluntary code on lending to small businesses after admitting on Thursday that the government was powerless to dictate the amounts or terms the banks offered the sector.

Ministers have been in secret talks with high street lenders to rewrite the voluntary code, ensuring small business customers are given reasonable notice before loans and overdrafts are axed or made more expensive.

There’s a good case for strengthening the code, as we did for mortgage lending,” one government official told the Financial Times. An announcement could be made next week.

The move comes amid increasing political concern that the £400bn state bail-out of the sector is not reaping the promised benefits for smaller companies.

Gordon Brown, prime minister, has insisted repeatedly that support for such companies is a condition of the £37bn taxpayer-funded recapitalisation of Royal Bank of Scotland, Lloyds TSB and HBOS.

But Mr Darling, chancellor, said the government’s requirement that the three banks make lending available at 2007 levels simply means “the pool of money is there”. Decisions on whether to lend that money, and at what cost, remained with the banks. “In any banking operation, whether it is lending to individuals or to businesses, there must be discretion,” he said.

That same right of individual bank discretion applies to the £4bn four-year funding from the European Investment Bank (EIB) being channelled through the banks that the government announced on Thursday. The £4bn represents less than 10 per cent of the total borrowing by small businesses in the UK.

Vince Cable, Liberal Democrat Treasury spokesman, attacked the government’s “utterly pathetic” position. “The whole point about this deal with the lenders was that there was supposed to be a tough quid pro quo. It’s perfectly obvious now that the banks got the quids and there’s no quo,” he told the FT.

Bank executives say privately that the government’s 2007 criterion does not bar them from tightening lending criteria or increasing interest charges. “We don’t sense any purpose in providing small businesses with loans that they cannot afford to repay,” said Eric Leenders, executive director retail, at the British Bankers’ Association.

As the EIB deal was unveiled on Thursday, Mr Brown stressed: “We must continue to encourage banks to lend. Having recapitalised the banks, we must ensure that the money is used to sustain credit lines on normal terms to solvent businesses.”

The prime minister added a personal note of exhortation: “I urge banks not to change the terms and charges for existing lending to small and medium-sized enterprises.”

But political opponents warned that mere rhetoric could not force the banks to change their behaviour. Angry MPs told the chancellor in the Commons on Thursday that the experience of small companies in their constituencies suggested the £37bn deal, agreed more than a fortnight ago, had yet to change practices on the high street.

Don Touhig, a Labour MP, complained that many small companies were being “faced with bully-boy tactics from British banks, which are simply cancelling their overdraft facilities and denying them vital capital to invest”.

Richard Spring, the Tory MP, reported some banks “changing small businesses’ overdraft facilities to loan facilities” – changes that could be “devastating . . . to businesses’ cash flow and chances of survival”.

John McFall, the Labour head of the Treasury select committee that will grill the chancellor on Monday, complained the banks “do not play fair” with business and urged Mr Darling to ensure the taxpayer was not the “sucker of last resort”.

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