The Funding for Lending Scheme (FLS) was launched by the Bank of England and HM Treasury in July 2012, as an 18 month-long scheme to boost the economy. The scheme was intended to increase lending to UK households and businesses by incentivising banks and building societies, providing access to lower cost funding.
The FLS links availability of this funding to the banks’ existing and incremental lending volumes, allowing the larger financial organisations to borrow more. The cost of borrowing was also linked to the volume of lending; the idea being that as banks increase the amount lent, the overall funding costs will fall and vice versa. The larger banks get a greater benefit!
The original scheme was intended to encourage broad participation and increase lending to households in the form of residential mortgages and loans to the business community. Whilst considered a success in the mortgage market, having lowered costs for first time buyers, there seems to have been little impact on small business. There has been criticism of the scheme and concerns that despite falling costs of banking funding, the volume of lending to companies has continued to decline.
The Bank of England scheme has faced the challenge from critics that, in the face of reduced cost of funding, bank lending has fallen by £2.4bn in quarter 4 2012. And, according to the Bank of England’s Trends in Lending survey, lending to business fell by almost £5bn in the three months to February 2013.
There appears to be demand in the market from business, but this isn’t being met by the banks. Are they remaining risk averse and only financing the straightforward applications, shying away from anything a little more complex as many business transactions can be?
Expanded and extended
It has now been announced that the scheme is to be extended for a further year, with renewed attempts to encourage more lending to small and medium sized businesses. Again based on providing access to funding at below market rates, this widening of the scheme will include non-bank subsidiaries of participating banks, and allows banks and building society participants to lend to asset finance and leasing companies. There are also additional borrowing incentives designed to skew lending towards SMEs.
Extending access of the Funding for Lending Scheme to involve asset finance businesses may help. Unlike the high street banks, these organisations are completely focused on lending to business. Whilst bank lending has fallen, asset financing has grown. The Finance and Leasing Association figures reveal asset finance penetration at the highest levels since 2008 and growth of 5% in 2012.