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UK banks fudge Funding for Lending to SMEs

I was trying to find out about the UK Government's Funding for Lending Scheme and why it isn't working, and managed to meet a senior small business lending manager with one of the UK's largest retail banks. He spoke to me off the record, but here's a summary of the discussion.  It's pretty enlightening.

I've been with the bank for over twenty years, starting as a teller and working my way through to middle management.

I now look after small to medium sized business lending for the bank's North West region, covering some of the largest cities including Manchester and Liverpool.

I asked him about the Funding for Lending (FLS) scheme. 

This is the £80 billion pound scheme created by the UK Government to stimulate the economy.  So far, it has improved mortgage supply but, quintessentially for a stagnant economy, it has done nothing to improve small business lending. 

Why?

Well, it’s a complete fudge isn’t it?

What do you mean?

Well the banks aren’t lending more, but they’re trying to look like they’re lending more by cooking the books.

Cooking the books?

Yes.  They’re not lending to businesses.  They’re just improving the bank’s balance sheet with FLS.

How can they do that when you have to prove to the Bank of England that they are lending to a small business to get any money from the Scheme?

I’ll give you an example.

I have one client in West Gorton, a suburb of Manchester.

His business borrowed £100,000 in 2007 and, over the last six years, he’s paid
down £60,000 of the loan leaving £40,000 of debt on our books.

Now we know he’s good for that money.  After all, over half has already been paid down.  So what I do, as I am told that I have to do this by my manager, is repackage the existing loan as a new loan.

Knowing that he’s paid down £60,000 and there’s £60,000 float on the existing loan, I offer a new loan facility to this customer of £120,000.

Now I don’t actually tell the customer that he has this loan facility, but I show on the bank records that we have extended an additional £120,000 loan facility to this business on the bank’s records justifying £120,000 line of credit from the Funding for Lending Scheme.

That way, the bank can shore up more capital whilst making it look as though they comply with the rules of the scheme.

Sneaky.

Very … but don’t tell anyone I told you that.

Of course not … but why are you telling me?

Because the bank recently screwed me over.

I'm not sure what I did, but we had a change of mangement and the new guy doesn't like me.  

So I've had formal disciplines for the first time in twenty years on three occasions recently.  These range from not addressing a customer properly in a written letter – I've known the customer for over ten years and he's happy for me to call him Mr. Tupperware (the business makes kitchen storage services).  They saw that I had written this in a letter and he disciplined me for it.  

Similarly, I had a disciplinary offence for not returning another customer's call in time.  The customer called whilst I was on holiday and the call was escalated to this new guy who used it as an excuse to try to get rid of me.

Not nice.

No, I've had a pretty hard time of it lately which is why I'm talking to you.

Why would they be trying to squeeze you out like this, after so long with the bank?

Because the bank is like a machine now.  They just want numbers achieved, not relationships.

But I thought it was going the other way.  After all the sales scandals – SWAPS, PPI in particular – I thought they were going back to true relationship banking.

Not in our bank.  In our bank, I am being replaced with guys in their twenties who are purely there to call customers for cross-sell purposes.

Come on, that cannot be true.  The FSA is clamping down on remunerating for achieving sales targets and so those sales and number oriented days are going to disappear.

Not in our bank.  In our bank, you get performance related reviews where you are expected to achieve a minimum number of product related services (not sales) to continue working with the bank.  If you exceed the numbers, you now receive a promotion or salary increase in your annual review.  It is not a commission or bonus, but a performance related mechanism based upon your competence at doing the job.

Sounds like sales targets and commission to me.

Me too, but don't tell anyone I told you.

Of course not … and how do you see your bank today?


Wolf-in-sheeps-clothing

Image sourced from Catholic in Brooklyn

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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4 comments

  1. Interesting piece this one! I wonder about its authenticity but it’s not hard to imagine this to be true. If lending is not lending for Productive Ventures, Investment that creates wealth and Jobs, then it is another waste of resources and Time.

  2. It just proves the only measure worth a damn is real net lending and not net facilities opened and most definitely not Gross. The BoE stats show the net figures and they continue to chart the decline. The scheme has had time to bed in but just look at the December figures.
    Does anyone know why the government chose to allow the banks 5% of their existing book at the give away rates before requiring any increase in business lending?

  3. Nuno
    The conversation is 100 percent authentic
    Chris

  4. And the guy is likely out of a job (although perhaps his manager should be).
    No matter. If you look at the big picture, it is pretty singular. The banks are undercapitalised. The central bank (or whoever can’t pass on the responsibility today) has one and only one prerogative:
    Re-capitalise the banking sector.
    Every programme is bent to that aim, by hook or by crook. If you look at all the QEs, they all hand a huge lump of cash from public to banks, so as to allow them to inch their way up, as a group, to better capitalisation levels. By various means, but that’s unimportant.
    Big picture. It will likely take a decade. What’s the alternative?

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