Is bank lending to business falling?

ANALYSIS
By Nils Blythe
Business correspondent, BBC News

Loans to small firms may be up, but the general trend is down

There are "lies, damned lies and statistics" - is a remark attributed to Benjamin Disraeli, the 19th century British prime minister.

And the enduring truth of the observation is illustrated by the latest figures on bank lending.

The British Bankers' Association (BBA) figures for lending to small businesses show a chunky increase of £391m in June.

The BBA rushed the figures out after Chancellor Alistair Darling expressed his concerns about the banks' support for business on Sunday morning.

Downward wider trend

But these figures only show a small part of the story.

The BBA classifies a small business as one with a turnover of under £1m a year.

The chancellor has expressed concern about lending levels to firms

And total "term lending" (that's lending excluding overdrafts) to small businesses amounts to £47bn.

That is a lot of money, but less than one seventh of all business term-lending, which amounts to £350bn.

And if we look at the BBA's own figures for lending to all non-financial businesses, we find that lending fell in June.

Indeed, the overall lending trend is emphatically downwards.

Again, according to the BBA's own figures, over the last six months the fall in lending to non-financial businesses averages £580m.

So the figures released on Sunday are highlighting what is happening in one small part of the business lending market.

But in its press release the BBA neglected to mention that the overall trend in business lending is moving in the opposite direction.

Recession impact?

The Bank of England produces its own analysis of what it calls "Trends in lending" each month. The latest is worth quoting at length.

"The flow of net lending to UK businesses remained negative in May," said the report.

"Some UK businesses repaid bank debt using funds raised on the capital markets [ie bond or share issues].

"But, taken together, funds raised by businesses from banks and capital markets remained weak. Spreads [ie the difference between banks borrowing and lending costs] and fees are reported to have risen in recent months."

The pattern of bank lending to businesses is therefore quite complex.

Very small businesses are getting more lending, as the BBA points out. But in general businesses are borrowing less.

Some banks argue that demand for loans has fallen because of the recession.

A lot of bank lending is associated with companies trying to expand or buy new equipment. And many companies are hunkering down to ride out the recession.

Taxpayer support

Total taxpayer support for the UK banking sector amounts to around £1.3 trillion - the equivalent of almost a whole year of economic output.

So the taxpayer is entitled to ask a lot from the banks in return.

The UK government says it has got a pledge from the banks it recapitalised (RBS and Lloyds) to increase their lending substantially - but has not published any data about how far they have met that pledge.

The government actually owns a majority stake in one of these banks, RBS, and a huge minority stake in another - Lloyds (which now owns HBOS), so it could order them to lend more directly.

But it has made it clear that it does not intend to use its ownership stake, which is held by an arms-length investment trust, UKFI, to interfere in the bank's commercial operating decisions.