Cable gets heavy with banks who refuse to lend

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Business secretary Vince Cable has put forward tough new banking sector proposals including a new tax on profits for banks which refuse to lend money to viable businesses.

Launching a new Green Paper [2] from the Department for Business, Innovation and Skills in consultation with the Treasury, Cable claimed that £50bn of new funds for small and medium sized companies could be freed up by slashing payouts to bank staff and shareholders.

As well as considering taxing the profits of banks which fail to support businesses, ministers are also looking into regional stock exchanges, encouraging venture capitalists and business angels to invest in a wider range of businesses and the extension of the Enterprise Loan Guarantee scheme introduced by the Labour government.

The British Bankers Association says its members are meeting 80% of requests for finance from company owners but Cable and business lobby groups claim many viable ventures are still struggling to secure credit.

"If we don't anticipate and tackle finance barriers now we could face a big problem in the future," Cable said. "Left unchallenged, a lack of accessible finance for businesses could prevent the recovery accelerating.

"I've heard the problems businesses are facing in getting bank loans up and down the country. They need innovative ways to access finance from other sources to grow our firms and economy. That's why this green paper is so important as we look to help viable firms get the money they need."

Chancellor George Osborne added: "As the economy recovers, it is crucial to ensure that the supply of finance supports rather than constrains demand and business confidence.

"If businesses are to play their part in promoting economic recovery it is important that they are able to access a diverse range of finance choices in a stable macroeconomic environment."

Employers' organisations welcomed the tougher approach.

"Our research shows that the government's Green Paper is timely in addressing lending as part of its move for a private sector led recovery," said Matt Goodman, head of policy at the Forum of Private Business.

"As with exploring alternatives to traditional lending, a ‘carrot and stick’ approach to encouraging banks to lend is sensible, providing the carrot offers a genuine incentive and the stick is a real deterrent."

Accounting professionals were more cautious in their appraisal of the new proposals. Daniel Shear, corporate finance partner at accountancy firm BKL commented: "Any steps taken to encourage more lending to small businesses must surely be welcome, even if it resorts to a carrot or stick approach. However, it remains to be seen whether the government initiatives will actually have much effect.

“Green Papers are unlikely to improve the situation – it is the economic environment that will encourage banks to lend," commented David Ingall, a partner at JWPCreers.

“One idea that might improve the position is for all banks to have a fund for risk lending to small businesses. This would be a relatively small amount (£20 million - £50 million per bank) where the normal strict rules would not be applied and where each individual loan would be restricted to £5,000 to £10,000. It is these small amounts that can be very frustrating. The fees and interest charged would have to be restricted to reasonable levels.

“The point is that even in the very unlikely event of nothing being repaid on any of the loans, the banks would not be exposed to unreasonable losses and very probably there would be some very happy and successful small businesses".