Small and Medium-Sized Enterprises

Baroness Drake Excerpts

Wednesday 26th June 2013 Lords Chamber

[Baroness Drake]

My Lords, I, too, would like to take the opportunity to compliment the noble Lord, Lord Cope, on his admirable chairing of the committee and on the excellent support that we received from the staff.

Increasing the contribution of SMEs to export-led growth acquires a new imperative when one looks at the structural shift taking place in the UK economy. The 1.3 million increase in the business population, from 3.5 million in 2000 to 4.8 million in 2012, has been mainly driven by SMEs. Over that same period the number of large private sector enterprises decreased by 10.2%, falling from 7,200 to 6,500.

SMEs are acquiring an increasing importance in the UK economy and delivering the step increase in exports that we so badly need. Finance to exporting SMEs must be assured. It is beyond dispute that bank lending to businesses has fallen, but the causes of this decline are contested. The noble Lord, Lord Heseltine, said that there did not appear to be a definitive answer as to whether the decline is due to a lack of supply from banks or to limited demand from businesses. What the report did identify, as my noble friend Lady Cohen mentioned, was the extent of the complaints by SMEs and executives about the insufficiency of loans and other services from the banks on “reasonable terms”. The distinction between the finance available for loans and the terms under which it is available may in part explain why some banks, such as RBS, argue that supply is not the problem, while at the same time exporting SMEs frequently argue that it is insufficient supply on “reasonable terms” which is at fault. Contributing to the problem are bank lending practices such as setting punitive charges and interest rates; onerous guarantees; exclusion of certain overseas markets from loan approvals; and the exclusion of certain activities from loan approvals. The replacement of relationship banking, where loan applications are judged on their merits, with a centralised, formulaic approach to lending decisions, is also part of the problem.

A pervasive formulaic approach may be a consequence of banks’ need to strengthen their balance sheets, comply with tighter regulations and reduce their risks, but it has to be confronted and addressed if SMEs are to access the finances needed for exporting. A return of local bank managers is unlikely to improve the position unless they are also empowered to have the discretion to decide on loan applications.

On Funding for Lending, billions may be drawn down by participating banks but insufficient is getting through to SMEs. The report recommended that the Government should study how banks assess the credit risk of SME exporters and different overseas markets in some detail. The Government’s published response was disappointing. While it said that the new business bank is expected to work with relevant bodies to reduce the obstacles to accessing finance on reasonable terms, it went on to say:

“It is not thought that a further study at this time would be productive”.

It was pleasing, therefore, to see the recent announcement by the OFT that it is bringing forward its review of banking for SMEs. The proposed scope of the OFT review includes whether SMEs have access to services that meet their needs and represent good value and whether there are types of SME that face particular difficulties and, if so, why. I acknowledge that the industry is working towards a voluntary disclosure regime, but as the Parliamentary Commission on Banking Standards observed, increased disclosure of lending decisions by the banks is crucial to enable policy-makers to identify markets, communities and geographical areas currently not well served by the mainstream banking sector.

The report also notes the very small number of SMEs helped by UK Export Finance, but recognises that the Government have now started to put more emphasis on it helping SMEs export overseas. However, new products such as the bond support scheme and export working capital scheme, launched to meet the gaps in the support to exporters from private sector providers, are accessed, again, through the banks.

The Government may have reduced the amount of risk that the banks are required to accept on these new schemes, but if the UKEF is using the high street banks as its route to market, given current bank lending practices these schemes are unlikely to deliver the desired help to SMEs to export. This is a view shared by bodies such as Science, Engineering and Manufacturing Technologies Alliance and Trade & Export Finance Limited.

Similarly, British SMEs cannot apply directly to the European Investment Bank for loans, but must go through one of the participating banks, which are required to match European Investment Bank loans from their own funds. Again, there is the potential for bank lending practices to constrain SMEs’ access to finance. The European Investment Bank’s own reports show that British SMEs have borrowed relatively little compared with several major EU economies such as France and Spain.

It is welcome that in response to the report the Government have committed to providing updates on activity in 2014 and 2015. Will the Government commit to commenting specifically and in some detail on what progress has been made in reducing the obstacles to financing SME exports on reasonable terms and the extent of the increase in the support from UKEF and EIB to SMEs’ export contracts?

An objective of the new business bank is to support the development of diverse debt and equity finance markets for businesses and increased supply through new finance providers. It is true that private sources of venture capital have fallen in number in recent years, but investment provided by both private equity and venture capital still makes a significant contribution to exporting SMEs. In 2012, 90% of the companies invested in by British Venture Capital Association members were SMEs. It is important that UKTI provides advice to SMEs on all sources of finance.

As the economy recovers, there must be confidence that the supply of finance will meet future demand and that there will be sufficient provision of long-term capital for SMEs to sell overseas. In his Statement on Building the Business Bank, Vince Cable, Secretary of State for Business, Innovation and Skills observed:

“Economic analysis suggests that the following types of firms are particularly underserved for finance: SMEs of all sizes who seek finance to expand their business or to develop new products and services; SMEs who lack the collateral to take out a secured loan; SMEs at the smaller end of the SME scale; Young SMEs which have existed for less than five years”.—[Official Report, Commons, 21/3/13; col. 50WS.]

Those four categories add up to a significant proportion of SMEs which have the potential to export being underserved.