Banks are unable to assess risks of lending to SMEs
ALBERT Einstein famously quipped that insanity is doing the same thing over and over again and expecting different results. A lesson, perhaps, that chancellor George Osborne and Sir Mervyn King, governor of the Bank of England, should heed.
The Bank of England and the Treasury have announced they’re working together on an £80bn “funding for lending” scheme, providing banks with cheap debt in the hope of expanding business and consumer lending. Does this sound familiar? Have we already forgotten the bold claims of Project Merlin, or the £325bn already pumped into the economy through quantitative easing (QE)?
We’ve become accustomed to big numbers. To put £80bn into context, it’s nearly equal to the Department of Education’s yearly budget and pretty much what the UK financial services sector paid in tax in 2011. It’s a deluge of money.
We have clients who are champing at the bit to hire staff, roll out new products and export to new markets. All of them are technology companies, and for most of them £1m in extra working capital is the difference between bumping along and taking off. Unfortunately, their retarded development is a result of the absence of venture capital and the unwillingness of banks to lend to businesses with intangible assets.
We believe that the bank bailouts, QE1, QE2 and Project Merlin add up to billions of reasons to show that it’s not a volume of supply problem. And it’s evidently not a demand problem – the clamouring of SMEs, starved of growth capital, confirm that daily. And it’s patently not a problem of political will.
Self evidently, it’s a distribution and a product problem. The distribution mechanism – through retail banks – is hampered by banks’ outdated credit processes, atrophied localised branch expertise and computerised bureaucracies. This is not breaking news – it was raised as long ago as 2009 in the Rowlands Report.
The product problem is a consequence of the banks’ inability to measure risk for anything without an obvious track record, underwritten by tangible assets. This has led to an obsession with debt – the very instrument that got us into the mess in the first place. If you lend £1m, the best return you can expect is a little more than your money back – this makes a lender very cautious. If, on the other hand, you invest £1m in equity, you have a chance of much greater returns.
This £80bn has to get to the places where it’s needed, and in a form that doesn’t prohibit it being supplied in the first place. And it needs to move quickly. Last week, the “funding for lending” promise was that £5bn a month would flow. If that is not to silt up the balance sheets of the retail banking sector, radical changes in distribution and product design must happen urgently.
However, if the funds don’t flow, the banks – King’s and Osborne’s growing responsibility – will benefitfrom the cheap money. Perhaps Einstein’s dictum need not apply.
Ken Olisa OBE is chairman and founder of Restoration Partners.