Darling to Give U.K. Small Companies Access to Capital Markets
U.K. Chancellor of the Exchequer Alistair Darling said he is planning measures to give small companies direct access to capital markets as banks curb lending to boost their balance sheets.
Darling plans to announce steps in his annual Pre-Budget Report, due in the next months. Some of the programs may be running by the start of 2010. The plan will allow institutional investors to raise capital or package loans for small companies.
“In the same way that big companies can access funding directly from capital markets, by issuing bonds or commercial paper, I want to start creating a different financial model in the future, in which small companies get funding from sources other than banks,” Darling writes in the Observer newspaper today. “Our goal is to make finance the servant, not the master, of the real economy.”
The plan marks the latest effort by the government to channel money to companies and households after orchestrating a rescue package for banks last year including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc worth 1.4 trillion pounds ($2.4 trillion). Small companies complain that, despite the bailout, banks are still holding back loans.
About 92 percent of finance to small and medium-sized companies is provided by Britain’s four biggest banks. Such companies tend to use those banks for all their financial services from accounting to foreign exchange, according to the U.K. Treasury.
Funding Reliance
“If there is one lesson to be learnt from this crisis, it is credit must never be allowed to dry up because of reliance on a small number of banks,” Darling wrote.
The British Bankers’ Association said loans to small companies increased by 23 percent in June compared with the monthly average for the year. The Federation of Small Businesses says this isn’t enough and in August expressed concern that merged banks will have too tight a grip on its members.
The small company lobby group in August also said that small firms are still finding it tough to get loans and overdrafts from banks.
Darling has previously said he plans to make the banking industry more competitive by lowering barriers facing new lenders. The Treasury is considering plans to reduce the two- year period it takes for an institution to be granted a banking license.
Lending Rates
About 52 percent of companies with sales below 1 million pounds paid more than 6 percent above the Bank of England interest rate in March compared with 35 percent in the same month in 2007, the Treasury said in July. Just over a third paid more than 9 percent above the central bank rate in March compared with 2 percent in 2007.
The Treasury took majority stakes in Royal Bank of Scotland and Lloyds in addition to nationalizing Northern Rock Plc and Bradford & Bingley Plc after financial turmoil brought the industry near collapse in 2007 and 2008.