The Funding For Lending Scheme (FLS) was introduced last summer in a bid to get British banks lending and kickstart the economy.
The idea was to get banks lending by giving them access to cheap funds from the Bank Of England that they, in turn, could lend to businesses and consumers. It is hoped that such moves will help shorten the number of business bankruptcies, debt plans and the numbers requiring a company voluntary arrangement to keep their creditors at bay.
“The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the Eurozone debt storm,” said George Osborne at the time.
So far the scheme has only been a partial success. In a March report the Bank Of England said that 39 banks were taking part in the scheme, and had drawn nearly £14 billion from the scheme between them. Net borrowing was still down by £2.4bn in the last quarter of 2012 however, and mortgage rather than business lending had seen the biggest effect from the scheme.
In February, Secretary of State for Business Vince Cable argued that the scheme should be more focused on small and medium enterprises (SMEs), and Deputy Prime Minister Nick Clegg reportedly called for the scheme to be “put on steroids”.
All of which led to the recent announcement that Funding for Lending would be extended by another year to January 2015, with a couple of significant changes.
The most significant is that banks will be encouraged to lend to SMEs by being given greater access to FLS if they do. For every £1 of net lending to small businesses they make in 2014, banks will be able to draw £5 from the scheme. In an effort to get them lending “sooner rather than later”, every £1 they lend to SMEs will give them access to £10 from the scheme for the remainder of 2013.
Non-banking entities such as leasing companies will also be able to access funds from the scheme for the first time.
George Osborne said: “This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The FLS 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.”
Whether it does actually encourage banks to up their lending to SMEs by significant amounts, only time will tell.