By Richard Johnstone | 24 April 2013
The government has extended the Funding for Lending Scheme for a year and introduced extra incentives to encourage banks to lend to small- and medium-sized businesses.
Today’s announcement, made by the Treasury and the Bank of England, means the scheme will now run until January 2015. Chancellor George Osborne said today that it had contributed to a reduction in funding costs for banks and building societies, which had led in turn to an increase in credit availability for businesses and households.
However, he acknowledged the improvement in credit conditions had been less marked for SMEs than for larger businesses and households since the lending initiative was launched last August.
In a bid to boost lending to SMEs, banks lending to firms will now be able to borrow in turn up to five times the value of these loans from the Bank of England.
In addition, to encourage quick lending decisions this year, every £1 of net lending to SMEs during the remainder of 2013 will be worth £10 in a borrowing allowance in 2014.
This is a change from the current scheme, which provides low-interest loans from the Bank of England as a percentage of banks' existing loan book.
Banks or building societies maintaining or expanding their loan book pay only 0.25% annual interest on the amount borrowed from the Bank of England, a rate that will be maintained in the expanded scheme.
Osborne said the expansion was ‘a big boost for the small and medium-sized businesses that are at the heart of the British economy’.
He added: ‘The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small- and medium-sized businesses so that they can play their full part in creating new jobs.’
Bank of England governor Mervyn King added: ‘The FLS has contributed to a sharp fall in bank funding costs and an improvement in credit conditions since the middle of last year. The changes announced today build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015.
‘I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase. Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised.’
The CBI said that the extension for the scheme was welcome. Matthew Fell, director for competitive markets at the business lobby group, said there are already signs that it was starting to lower the cost of finance for businesses.
‘The additional incentives for banks should accelerate activity in the small business financing market,’ he added.
