A government scheme aimed at providing cheaper loans to individuals and businesses has been launched by Chancellor George Osborne today.
The Funding for Lending Scheme will allow banks and building societies to borrow cheaply from the Bank of England if they pledge to pass the money on in loans to households and businesses.
The Treasury said the scheme, first announced in June, will provide ‘credit easing to the whole economy’ by giving lenders incentives to increase lending over the next 18 months.
Participating institutions can borrow up to 5% of their existing loan book. Each will pay a fee for borrowing through the scheme, with the price dependent on the volume of loans that they make from the end of June 2012 to the end of December 2013.
Banks or building societies maintaining or expanding their lending over that period will pay 0.25% annually on the amount borrowed. If total lending declines, the fee will increase, up to a maximum of 1.5% interest if it falls by 5% or more.
It has also been announced that the National Loan Guarantee Scheme, launched in March, will be absorbed into the new scheme.
Osborne said that the NLGS had made ‘a real difference’, with more than 16,000 cheaper loans, worth over £2.5bn, having already been offered to businesses across the UK.
He added: ‘In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work.’
However, the ‘more generous’ Funding for Lending scheme ‘will in time effectively take over from the NLGS, delivering credit easing to the whole economy’, he said.
The CBI said that the scheme could address increasing borrowing costs for businesses, which ‘have held back the growth ambition of many small- and medium-sized firms’.
Director general John Cridland said: ‘This scheme should support banks to make finance more affordable to businesses and consumers, while also encouraging banks to lend more.
‘The Funding for Lending Scheme is likely to naturally replace the National Loan Guarantee Scheme over time because it is a bigger scheme that is open to a broader range of firms.’
