Small and Micro-Business Borrowing

Baroness Kramer Excerpts

Thursday 24th May 2012 Lords Chamber

Tabled by

[Baroness Kramer]

To ask Her Majesty’s Government what steps they are taking to facilitate alternatives to high street banks for small and micro-business borrowing.

[Baroness Kramer]

I very much thank the House for giving me the opportunity to bring forward a debate on small business and credit and the failure of high street banks to offer that credit and therefore the alternatives that we must look at. I warn the House beforehand that I am going to focus in the time that I have on two areas of particular interest to me, so I thank the other noble Lords who are going to participate in this debate in advance, because they will expand the conversation way beyond the range which I am capable of introducing.

There is very little dispute today that small and micro-businesses especially are struggling to access credit from the five high street banks that dominate banking in the UK, and that has been going on since the crash of 2008—and there were underlying problems before them. The Breedon report was very good; it quoted recent data that showed that 33% of SMEs applying for a loan were rejected and that the decrease in the supply of loans to SMEs in the UK has been much sharper than in other countries. We have a piece today in the FT that says that small businesses lament the shrinking pool of credit. If we needed a real illustration, the entry of Wonga into this field with potentially 2% of interest per week says in every way that there is a very serious vacuum. The truth is that the view of high street banks in this country is that “bankable” credit is a very narrow term indeed. Most lending for SMEs over past years has effectively been a form of real estate; it has not been an assessment of the business plan. It is not just that the high street banks will not do this lending—they cannot. They no longer have local knowledge; they do not have trained credit staff; they are now into a form of centralised tick-box commodity-type lending activity. The contrast is sharp with the German savings banks, the Swiss cantonal banks and the US community development banks, which are a backbone to SMEs in Germany, Switzerland and the United States. In those countries, lending has increased since the crash.

The banks that I just mentioned have a common characteristic: a social obligation as part of their mission, as well as profit—so not just a sole profit-maximisation obligation. Those banks are tied to a specific geography, so they are forced to make a success out of local businesses and to take a long-term view; they cannot diverge into other ways of earning money. Dr Thomas Keidel, who is very senior in the German savings bank association, talked to some in this House, making it clear that that local knowledge gives an intimate assessment of risk in a way that even a regional bank cannot accomplish. He said that many of the best credits in the German system are risks that would have been turned down had it not been for knowing management, understanding the order book and really being sensitive to the local issue. That is crucially different from the savings banks in Spain—they are in great trouble—which do not have that geographic link.

I argue that, frankly, this is a tier of banking that we do not have in the UK. We have some valuable community development financial institutions, credit unions, funds and banks. I have visited many, including a brilliant business enterprise fund in Bradford, but they are small and fragmented, and their geographic coverage is fairly random. I know that the Government will say that there is now an agreement with the British Bankers’ Association that high street banks that turn down a credit will then refer that small business to a local CDFI. However, that is relatively meaningless unless CDFIs are coherent and comprehensive as a sector and have sufficient funding to meet demand. At present, the CDFI sector in this country is swamped. One of the banks calculated that if they were really going to meet need, they needed something like £125 million of potential lending a week, but they are nowhere near that. The irony is that plenty of investors would like to get engaged with the sector, especially social enterprises, charities and philanthropic individuals, as well as commercial players. With the additional growing capacity to raise funds through the new sector of social impact bonds, there is huge potential to support an equivalent to the local and community banking sector.

We have to remove the regulatory barriers to new entrants into the banking system in the UK, which prevents social entrepreneurs and others getting new banks started. The FSA would say that nobody applies, but look at the experience of Metro Bank, the only bank in recent history with a new banking licence. We all know the numbers—something like £25 million to get regulatory approval, in two and a half years. Consultants in the banking arena all say to anybody interested, “Don’t even try. See if you can buy a banking licence, but otherwise forget it in the current climate”.

[Lord Flight]

My Lords—

[Baroness Kramer]

If I take interventions I will not get through my speech, so I am going to carry on.

I refer anybody questioning the barriers that come through the regulator to a very good piece called Street Cred by Civitas. It is a bit melodramatic, but it underscores all the difficulties that people face. I have talked with people in the US, and they reckon that it takes roughly six months and costs $2 million to get a new bank started. That is a very different situation.

The Government must develop a specialised bank licence and an appropriate set of capital requirements for small local-community banks undertaking the social impact obligation. We need off-the-shelf packages for small bank start-ups to provide economies of scale, including basic regulatory approval, working software and other forms of support. The US does it—it is called “bank-in-the-box”. We need a regime to enable banks that fail to be dealt with quickly as that gives confidence, especially to the regulator, to lower entry barriers. The Banking Act 2009 failed to do that. The FDIC in the States does a far more effective job. We have to introduce such a regime. I do not see signs of it but I hope that it will come. We should also deal with the VocaLink payments system, which is owned by a cartel. There are many regulatory barriers and failures in the system. Their removal could make a fundamental difference to what we do.

I wish to make two suggestions. First, RBS is, frankly, an albatross around the Government’s neck. If RBS’s branch network were used to create a community banking network, we could see a massive and rapid step change in this area. Secondly, we should examine what kind of lending high street banks undertake, see where the gaps are, and whether they are genuine gaps. It seems to me that there is an argument for saying to those banks, “We are not going to make you undertake this lending but we will have you fund someone else who can through capitalising a local community bank”.

In the time I have left I wish to say a few words about the innovative online lending platforms. I am not talking about companies such as Wonga but about the platforms that have investors on the one side and borrowers on the other and offer non-exploitative lending rates. They are new in the field and have grown up in the past two years—for example, companies which offer crowd financing and peer-to-peer financing. I am sure that noble Lords find that term hilarious. This industry has significant potential but is begging for stronger regulation. There is an enormous fear in the industry that a couple of cowboys might come in and create havoc, resulting in terrible headlines, investors fleeing and the regulator intervening in an incredibly heavy-handed way. It is crucial that the Government provide a more constructive regulatory framework which is proportionate and does not stifle the industry’s growth but which engenders confidence in the industry so that it can move forward.

I do not want to pretend that the Government have done nothing in this area. I am sure that the Minister will list what they have done. I acknowledge that things have been done but not on the scale that is necessary to support our SME sector. It is vital that the Government understand the limitations of the high street banks instead of constantly telling them that they should lend to these companies. They will not and cannot do that. The Government must have a coherent plan to fill this vacuum and must enhance the opportunities for local banks and quality online lenders. One of the problems is that there is no one in the structure of government at the moment who leads on this issue. It is split between BIS and the Treasury, and within the Treasury there must be five Ministers covering different parts of it. The Government should identify a champion to try to resolve this problem and take it forward. If they do not, we will not sustain our small businesses which are the backbone of our economy and we will give all the space to our competitors.