General Matters

Debate between Jim Cunningham and Naomi Long

Tuesday 18th September 2012 Commons Chamber

[Naomi Long (Belfast East) (Alliance)]

I wish to raise a matter of importance to my constituents and those of many other Members, namely the availability of borrowing to small and medium-sized businesses and, particularly, the monitoring of that lending activity.

Most of us will have spoken to local business people who lament the lack of access to finance and lending facilities. Over the recess, I met a small number of business owners who indicated that their experiences had improved little in the past year. Although banks have repeatedly stated that they are open for business and ready and willing to lend to small and medium-sized enterprises, I continue to receive complaints about aggressive management of existing loans, reduced overdraft facilities and a general lack of flexibility in the approach of banks, all of which place otherwise viable businesses under stress.

Anecdotal evidence suggests that, in some cases, when businesses approach banks to seek an extension of their facilities, bank officials are pressuring them into accepting unwelcome changes to the terms and conditions of their existing loans, or into reducing their borrowing through asset disposal. In the current economic climate, people’s ability to shop around for a better deal is somewhat constrained. The wider impact of that on our economy and its recovery is reflected in the fact that the Government have placed considerable emphasis on initiatives to increase the availability of bank lending specifically to the SME sector. For example, one key aim of Project Merlin was to ensure that banks would commit to lending more money, especially to small businesses. However, that has been superseded by new credit easing plans. Initially there was the national loan guarantee scheme, which was again aimed at encouraging such lending.

As market conditions changed, making it less economical for banks to raise unsecured funding, the Government again responded. On 1 August, they introduced the funding for lending scheme to incentivise bank lending to UK households and businesses by allowing banks that increase lending to borrow more from the fund, and at lower cost. Taken in conjunction with the business finance partnership, the enterprise finance guarantee scheme and other recent announcements by the Treasury and the Department for Business, Innovation and Skills, it is clear that lack of access to affordable lending for business is recognised as a significant problem, a barrier to recovery, and an area to which the Government continue to give considerable attention in search of a solution.

We could probably have a lengthy and lively debate about how effective some of those interventions have been, but I want to focus on two specific issues in the monitoring of lending activity: first, the degree to which announcements of new UK-wide initiatives lead to an improved situation for Northern Ireland’s consumers; and, secondly, the lack of consistency and clarity in the way in which lending generally, and new lending in particular, is defined by the banks.

First, as banking is a reserved matter, work undertaken at UK-wide level will, and indeed should, have a direct impact on my constituents, but there is considerable scepticism as to whether it has done so meaningfully to date. In Northern Ireland, only one of the main banks participated in Project Merlin, owing largely to the structural differences between the Northern Ireland and UK banking sectors. Two of the four main Northern Ireland banks have parent banks in the Republic of Ireland, while a third has its parent bank in Denmark, leaving only one with a parent bank here in the UK. Furthermore, no regional targets for lending were included in the Merlin scheme, with the result that its effectiveness in Northern Ireland, and the reasons behind that performance, were not able to be monitored or to be taken into account when devising replacement arrangements or new incentives. The result was that the national loan guarantee scheme replicated some of those problems where participating banks accounted for a smaller proportion of the Northern Ireland business market than would have been the case in most other regions.

To bridge the gap in regional monitoring, quarterly figures have been provided to the Northern Ireland Finance Minister through the British Bankers Association statistics, “Bank Support for Businesses in Northern Ireland”, for monitoring purposes. These confidential figures are based on the information provided to the BBA by the four main Northern Ireland banks and are intended to allow monitoring of the levels of lending to SMEs, as well as other activity. However, as banking is not devolved, the Finance Minister can neither require banks to provide that information nor require them to do so in a particular format, and as the statistics are deemed commercially sensitive there can be little open scrutiny of their content.

This is a matter that Northern Ireland Members have raised often in this House and with Treasury Ministers. In a statement to the Northern Ireland Assembly earlier today, the Finance Minister indicated that the Treasury has agreed to monitor the participation of Northern Ireland banks in the funding for lending scheme, which is a huge step forward that I strongly welcome. However, for that monitoring to be meaningful and effective, there must be some transparency and consistency in how lending is measured and reported by banks.

That leads me to my second point. For some time, there has appeared to be a gap between the headline figures for new lending by the banks and the experience of those who are seeking to borrow money and finding it difficult to do so. This may be at least partly a result of the lack of consistent definition of what constitutes new lending. This is not a new problem, nor is it unique to Northern Ireland. Research that I obtained from the House of Commons Library confirmed that the Merlin agreement did not include any detail on the definition of “lending” or, in particular, on what constitutes new lending. Since then, the underlying problem of the inconsistent definition of what is included in bank lending figures and what constitutes new lending has apparently remained unresolved.

In the summer I wrote to the main Northern Ireland banks about the breakdown in new lending that they had made available to businesses over the course of the past year. Each institution stressed that the information was commercially sensitive. Furthermore, I would not want to expose those who shared more detailed information with me to a criticism of their approach when it may be no worse or, in fact, better than that of some of their competitors who chose not to be so open and frank. I will therefore refrain from citing any specifics that could identify individual lenders and focus instead on broad trends, which indicate that the actual figures for what the average person would consider to be new lending may well be considerably less than the headline figures that are published. In one case, over 90% of advertised new lending was to existing customers. That is perhaps not surprising, as there are strong commercial reasons why it would be easier to lend to an existing customer than to a new customer. An established relationship, with knowledge of the borrower’s credit history, business cash flow, management strength, and business model, gives the lender confidence that they will be able to service the debt and ultimately repay their loan. However, the fact that that bias extended to 90% of all new lending in that year was more surprising. Given that the remainder would include people who were switching facilities from other banks, and therefore had a well-established credit history, it demonstrates what a small proportion of overall new lending is likely to be to new businesses, correlating with the anecdotal evidence that they, in particular, struggle to get access to the finance they require. Given the importance of innovation and new business set-ups to the economy, and the emphasis placed on those by the Government, this is an area of real concern.

Further examination showed that that new lending also included overdraft renewal and loan restructuring. The lending offered to customers in such circumstances might be no more than was originally the case—it might even be reduced—but it would still be captured by the bank as new lending. Furthermore, it might be accompanied by a worsening of terms and conditions with the result that, although offered and counted towards targets for new lending, it might never be drawn by the company with that agreement. However, it would still count towards new lending in that an agreement had indeed been reached and approved.

From my discussions with banks, there seems to be considerable variation in what is captured by their internal systems as new lending for monitoring and recording purposes. For one bank, new lending figures would not include an extension of existing overdraft facilities or extending the repayment period of an existing loan, in contrast to some of its competitors. However, it also revealed not only that its definition of new lending would capture an existing loan that was increased, but that the entirety of the final loan sum would be captured as new lending, not merely as an increase in the borrowing.

[Mr Jim Cunningham]

Does the hon. Lady agree that one purpose of quantitative easing was to free up money to help small businesses? Instead, the banks have been using it towards their own debts.

[Naomi Long]

It would certainly appear from the brief analysis that I have undertaken of banks that service my constituency, and indeed service Northern Ireland, that there has not been a significant increase in lending to small business. That should concern us all.

To return to my point, if a business with a loan of £90,000 borrowed an additional £10,000, the entire £100,000 loan would be captured by that bank’s system as new lending. That is perhaps an extreme example, but it shows the significant distortion to new lending figures that might occur, depending on what is captured by the bank’s internal systems. Given that most new lending is to existing customers, that factor could be very significant. The effect may be offset somewhat by comparing new-lending figures with a bank’s stock of lending—that is, the outstanding loans to be repaid—but there is a lack of transparency and consistency in what is measured, and indeed publicised, by banks, particularly as they most frequently use the new-lending figures to defend themselves against criticism that they are making it difficult for SMEs to access lending.

While the UK Government clearly recognise the importance of access to borrowing for UK households and businesses, there needs to be increased monitoring of the impact and a tailoring of initiatives to Northern Ireland markets, where the banking sector is distinct and different from that in other parts of the UK. The matter is not devolved, and proactive consideration of it in this place is crucial.

Furthermore, in the interests of transparency, there needs to be a clearer and more consistent definition across the banking sector of what constitutes new lending, and of the methods of measuring and reporting on banks’ lending activity generally, so that when such figures are quoted in isolation they remain meaningful and a useful tool to measure the impact of Government lending initiatives where that matters most—in the businesses across my constituency and the constituencies of other Members.