BANK LENDING

Bank lending to businesses is projected to slump to its lowest level for seven years, a report from Ernst & Young has warned.

UK banks will lend £422 billion to firms this year – the lowest amount since 2006. This is well below the £575 billion lent in 2008 before the financial crisis.

The figures from the Ernst & Young Item Club underline the crisis facing many companies as banks starve them of the funds they need to grow and prosper. The problem poses a serious threat to the economic recovery.

The Item Club report warns that lending will not return to its pre-recession peak until 2017.

Financial analysts fear small and medium sized firms are struggling to get the funds they need to grow, or by taking on staff that will be needed to drive the economy.

The further fall in lending this year will disappoint officials at both the Treasury and the Bank of England, who launched the £80 billion Funding for Lending scheme last summer.

This scheme was intended to increase the flow of cheap loans for households and businesses.

While there is evidence that mortgage lending is increasing, particularly to first-time buyers, there is little to suggest that small firms are getting access to the money they urgently need.

The Item Club report also showed that around £200 million was lent last year to small and medium-sized enterprises, or SMEs, through ‘peer to peer’ lending – which allows people to lend directly to businesses.

An economic adviser to the Item Club, said:

… We expect peer to peer lending to grow rapidly in the next few years as demand for funding from SMEs outstrips supply from the banks.

The report does predict, though, that bank lending will pick up as the economy recovers, rising to £452 billion next year, £497 billion in 2015, £545 billion in 2016 and £602 billion in 2017.

A spokesperson for the accountancy firm Ernst & Young, said:

… Corporate lending won’t increase enough in 2013 to compensate for the dire first half of the year. We expect it to pick up in 2014, raising hopes that UK companies may invest some of the cash back into the wider economy.

… The banks should be able to increase their credit supply – regulation permitting.

And, despite the recent pick-up in the economy interest rates look set to remain flat lined. The Bank of England’s monetary policy committee, which will meet on Thursday, is widely expected to peg interest rates at 0.5 per cent for a 54th month in a row.