Cable bank bonus threat over SME loans

Vince Cable has backed the extension of preferential lending to small and medium-sized enterprises (SMEs), threatening banks with penalties if they fail to provide loans to good businesses.

In a joint Green Paper with the Treasury, Cable's business department proposes extending the Enterprise Finance Guarantees (EFG) beyond March 2011 when it is due to expire.

Introduced as a temporary scheme to drive additional bank lending following concerns about the availability of credit for SMEs, the EFG provides government guarantees on corporate loans.

However, figures released this month suggested EFG lending had fallen 23% in the six months to March, compared with the previous six months.

Today's paper, Financing a private sector recovery, says SMEs are "a vital part of the UK economy", with the potential to make a "significant contribution" to economic growth.

It says the EFG addresses long-standing and structural challenges for SMEs such as the inability of viable businesses to gain debt finance without sufficient security or a strong track record.

"This means an extension of EFG, or a more permanent successor scheme, is likely to be required going into next year", the paper states.

The coalition Government last month extended the amount of money available through the scheme by £200m to £700m.

But the Federation of Small Businesses (FSB) says it is concerned the "ebb and flow" of lending under EFG depends on ministers "having their eye on the banks".

According to the BBC, banks which fail to offer credit could be made to sign up to the same type of lending agreements placed on the part-nationalised RBS and Lloyds.

These include penalties on executive remuneration for failures to boost lending.

The Bank of England's Financial Stability Report, published in June, estimated if UK banks limited bonus and dividend payouts to pre-crisis and 2009 levels respectively, banks could generate around £10bn of additional capital over 2010.

In turn, this could sustain £50bn new lending.

Demand for bank loans naturally declines during a recession as businesses cut back on inventories and capital investment, and build up cash reserves. Since 2008 debt repayments have continued to exceed new lending.

The deadline for responses to today's paper is 20 September.