UK to extend business lending scheme, restrict to small firms

LONDON, Dec 2 (Reuters) – Britain’s government will offer banks cheap credit for another year, but only if they use it to support small businesses, finance minister George Osborne said on Tuesday ahead of a major budget update.

Osborne intends to use Wednesday’s fiscal update — the penultimate one before May’s national election — to extend the Funding for Lending Scheme (FLS), which was due to end in January, and announce other measures to support business.

Osborne launched the FLS with help from the Bank of England in July 2012, when banks were struggling to get access to cheap finance due to the euro zone debt crisis.

So far it has failed to increase net lending to small businesses, despite lenders drawing nearly 48 billion pounds ($75 billion) from the scheme.

Banks were initially able to use the FLS to boost mortgage lending — something which helped revive activity in Britain’s housing market — but since the start of this year they have been required to focus on businesses alone.

On Wednesday its scope will be narrowed further to focus only on small firms, as larger companies have little difficulty raising finance via bond and share sales.

“Now that credit conditions for households and large businesses have improved, it is right that we focus the scheme’s firepower on small businesses, which are the lifeblood of our economy,” Osborne said in a statement provided by his office.

Figures from the BoE last week showed that lenders using the scheme cut net credit to small businesses by 128 million pounds in the three months to September — though this was the smallest reduction this year or for much of 2013.

Banks argue that small firms are often reluctant to borrow, and prefer to pay down their debts after bruising experiences during the 2008-09 financial crisis.

Britain’s finance ministry said gross lending to small businesses had risen by 20 percent in the year to October.

Lloyds Banking Group , which is partly state-owned, has been the biggest user of the FLS in its latest form, taking 4.0 billion pounds of funds in the three months to September. Santander accessed 1.3 billion pounds.

Osborne also plans to announce more funding for the British Business Bank, a public body which offers finance to firms, usually in partnership with private financial institutions.

Some 400 million pounds will be available for the bank’s venture capital scheme, and it will also be able to guarantee a further 500 million pounds of loans.

(1 US dollar = 0.6397 British pound)

(Reporting by David Milliken, editing by William Schomberg)

UK to extend business lending scheme, restrict to small firms