Bank managers who know their customers b y n a m e c o u l d b e making a
comeback in towns and cities in England and Wales as councils explore ways
of helping small firms that are starved of finance.
Plans to open banks backed by local councils are already under way in Essex
and Birmingham and others look set to follow. The councils are stepping into
the gap left by Britain’s beleaguered high-street lenders in a bid to prop
up their slumping local economies and prevent redundancies.
Essex county council hopes to start lending to local firms in the new year
with plans to make about £50m available in total, said the council’s leader,
Lord Hanning-field. “The large UK banks don’t seem to be doing any better
than they were a fortnight ago in terms of their lending to small
businesses. I think we’ve discovered a way to fill the vacuum. It’s all
going very well and we should be lending by January.”
High-street branches of a Bank of Essex, investing the savings of Essex
residents, were also a possibility, perhaps via a tie-up with an
American-based regional bank of the same name, he said.
“It may well be that we can link up with the Essex Bank in Virginia in the US.
I know the chairman of the board and I’ve spoken to him on the phone. In the
US small banks have done very well and they are doing what we want to do
here – making small loans to small businesses they know well.”
The banking industry may be going back to an era when small firms had closer
personal relationships with their banks, said Han-ningfield. “We have lost
personal service. We need banks to get to know small businesses again. Small
businesses don’t know who their bank manager is these days and lending
decisions are made miles away.”
Birmingham city council is drawing up its own scheme, which could provide up
to £200m in funding to shore up lending and support firms through the
downturn. Others, including Manches-ter city council and West Sussex and
Kent county councils, have also expressed interest.
Local authorities’ size and their solid lending status gave them the potential
to raise significant amounts of money, said Stephen Hughes, chief executive
of Birmingham city council. “We can get access to finance cheaply and, given
the market failure that appears to be happening at the moment, we think we
can play a role in helping where firms have viable propositions but have
problems getting finance.”
Councils could make direct loans to firms, offer commercial mortgages or buy
assets and lease them back to business. The Municipal Bank of Birmingham,
pioneered by Neville Chamberlain, which operated between the two world wars,
was a local precedent, said Hughes.
“Its main role was as a kind of credit union, a safe haven for people to save
with. Moves towards modern-day credit unions could be a good thing.”
The council initiatives came as the large UK banks revealed that overdrafts
and other lending to small firms were cut in October. In a meeting with
ministers and representatives from small-business organisations, banks
revealed they had cut a third of company overdrafts and refused more loan
applications, although lending levels overall were holding up.
The banks’ insistence that lending levels are being maintained does not
reflect the picture that commercial-finance brokers are seeing, said Adam
Tyler, chief executive of the National Association of Commercial Finance
Brokers. “There were entire days in October when there was no lending being
done at all. I would expect lending through our members this year to be a
third of last year’s level, about £5.5 billion, unless things really pick up
in the new year,” he said.
“The banks are still lending money, but only to the right deals. Only
commercial deals of 50% loan-to-value on owner-occupied commercial premises,
to businesses with good profit margins and good credit histories seem to be
getting done right now.”
A survey of commercial brokers carried out by Lendertracking.org, confirmed
deep dissatisfaction among small firms, said finance broker William Flatau
who established the survey. It revealed that some banks were demanding rates
of 4 to 7 points above Bank rate, with large arrangement fees to accept the
loans and increases in fees to existing clients - many of them with solid
track records.
Restaurateur Asad Khan has been looking for a commercial mortgage to replace
expensive bridging finance after his bank backed out of a deal earlier in
the year to fund the £280,000 purchase of a third restaurant in his chain,
India Dining.
He has finally secured a deal with a bank – but at a price. “It’s costing us
£10,000 to do the deal and we’re paying 3.2 points over base rate. That’s
almost three times what we are paying on our other lending, which is 1.25
points above base rate,” said Khan.
“It’s overpriced, but it’s the only other offer on the table. Gordon Brown is
all for the banks lending, but things are still at a standstill and if they
don’t lend, things are not going to get better,” he said.
“I don’t think lending will come back in a hurry because banks are going to be
very cautious.”
