BOE Credit-Boosting Program Extended as Small Companies Targeted

By Gonzalo Vina & Scott Hamilton

The Bank of England will extend by one year its plan to provide cheap loans to companies and consumers and make credit available for small companies, enhancing a nine-month-old program to aid the economy.

The Funding for Lending Scheme will now last until January 2015, and will make lending to small companies more attractive and open to non-bank lenders, the BOE and the Treasury said in London today. The government says its program has lowered borrowing costs by about 100 basis points and provided 13.8 billion pounds ($21 billion) between its creation and December.

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” Chancellor of the Exchequer George Osborne said in an e-mailed statement. “This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Osborne is expanding the program on the eve of economic statistics that may show Britain’s economy was close to an unprecedented triple dip in the first quarter. The announcement also precedes an audit of the U.K. by the International Monetary Fund, whose delegation visits London next month after the fund said Osborne should ease his austerity plan to aid growth.

Today’s extension to the FLS will allow banks to borrow 10 pounds next year for every 1 pound they lend to small companies in 2013, the Treasury said. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. Banks can borrow 1 pound for every pound loaned with the rest of the program.

No Limit

The size of the program depends on how much banks lend and has no upper limit. Non-bank lenders, such as specialist finance houses that are also a source for loans for small companies, will also be allowed to tap the program, the Treasury said.

“It is right that it is skewed towards the SME sector which has suffered the most from the credit crunch,” Business Secretary Vince Cable said in a statement. “More credit for small businesses is essential to building a stronger economy.”

The FLS was first announced in June by Osborne and BOE Governor Mervyn King. It began operating in August and allows banks to borrow treasury bills from the central bank to fund lending. Under the original plan, they had 18 months to use the facility and as long as four years to repay. That plan also only allowed banks with access to the BOE’s discount-window facility to use the program. Data from the FLS on March 4 showed that the net flow of lending shrank 1.4 billion pounds from June 30 -- the base reference period -- until the end of 2012.

Balance Sheets

Some banks responded by saying the decline was partly due to efforts to shrink their balance sheets. The BOE said at the time that while there are “indications of an improvement” in credit conditions, “it will take time for this to feed through to lending volumes, given the typical lags involved.”

The FLS has so far benefited the mortgage market more than corporate lending, with smaller companies seeing the least benefit. In survey on April 3, the BOE said while credit availability for companies improved in the first quarter, this was confined to large companies.

“The impact of the FLS is likely to be more marked in coming months,” BOE policy maker Ian McCafferty said yesterday. “The bank’s latest Credit Conditions Survey shows that the recent improvement in the availability of credit, particularly in the household mortgage sector, is expected to continue.”

Factory Index

A report yesterday showed a U.K. factory index unexpectedly fell to the lowest in 2 1/2 years this month. The economy probably grew 0.1 percent in the first quarter, according to a Bloomberg News survey, barely escaping another recession after shrinking 0.3 percent in the previous three months. The Office for National Statistics will release that data tomorrow.

Fitch Ratings stripped Britain of its top credit grade on April 19, citing a weaker economic and fiscal outlook. It lowered its 2013 and 2014 growth forecasts to 0.8 percent and 1.8 percent from 1.5 percent and 2 percent. The Treasury in London said the downgrade was a “stark reminder that the U.K. cannot simply run away from its problems,” reinforcing Osborne’s commitment to his deficit-reduction program.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

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