Banks under pressure to lend to businesses

Banks could face the threat of nationalisation if they do not start lending to small businesses again.

The warning has come from John McFall, the chairman of the Commons Treasury Select Committee.

The government is concerned that, despite being given billions in bail-out liquidity funding, the major banks are still showing signs of reluctance to free up affordable credit for viable businesses.

It is thought that the Chancellor, Alistair Darling is possibly planning a scheme which could set a ceiling on the interest payable on loans by small businesses or could underwrite small business loans made by the banks.

Mr McFall said that banks should be “actively lending instead of sitting on their hands”.

He added: “Governments on both sides of the Atlantic have called on them to resume lending, and criticism has been directed to the banks that they are not shaping up to the task at hand. If the banks do not play ball, and will not resume lending, then the demand for full-scale nationalisation may well grow."

Businesses in particular needed access to competitively priced lending.

Mr McFall said: “There are 4.7 million small and medium size businesses in the UK, employing 13.5 million people – almost 60 per cent of the private-sector workforce. These are very large numbers. They need loans to help them sustain these important jobs.”

Mr McFall argued that the banks, rather than hoarding funds, should ensure that reserves are used for lubricating the credit market.

One problem has been the price of the £37 billion cash injection from the government, which is costing the banks at a rate of 12 per cent.

Mr McFall continued: “Banks may be diverting much of their income towards repaying this aid, rather than expanding their loan books. In my view, this must stop: banks may have to get used to the idea of being part-nationalised for a longer time.

“If they don’t then one answer would be for the state to step in again and guarantee mortgages and other retail loans If the perception gains hold that the banks are continuing to refuse to lend, then a website should be set up for small and medium businesses to report the fact that they have been refused a loan and record their dismay about the way they have been treated.”

The British Bankers’ Association responded by saying that banks had to decide if lending to a firm made commercial sense, and that they are still faced with expensive inter-bank borrowing rates.