Banks promised to lend at least £76bn to small businesses under Project Merlin deal but only £74.9bn was handed over
High street banks have missed government-imposed targets for lending to small businesses, sparking a row over last year's Project Merlin deal and raising concerns about the health of the economy.
The British Bankers' Association, representing the five banks which signed up to the Project Merlin deal to lend £190bn to businesses last year, admitted that while the banks had promised to lend at least £76bn to small businesses only £74.9bn had been handed over.
The BBA said the banks had "met their overall business lending commitments" by lending £214.9bn in total during a year in which demand for loans was weak.
But Lord Oakeshott, the Liberal Democrat peer who resigned a year ago as his party's Treasury spokesman in the Lords over the Merlin agreement, described the banks' record as "pathetic" and regarded the use of the word "overall" as hiding the true picture.
"Who do they think they are fooling with this specious spin? The Bank of England on Monday will give the real grim picture of some banks' damaging failure to meet their small business lending promises under Project Merlin and their cynical attempts like this at a cover up," Oakeshott said.
Industry sources say the bailed out Royal Bank of Scotland is behind on its targets although Peter Ibbetson, chairman of the bank's small business operations, said this was not the case.
Stephen Hester, the RBS chief executive, said last week that his bank's lending would be greater than all its rivals combined. "Forget Project Merlin and how it's defined - that's damned impressive," he said.
There was no official bank-by-bank breakdown of lending during 2011 – and neither was there precise information about what had happened to net lending – which would show whether the amount being lent out was greater than the volume of loans being repaid. Mark Hoban, financial secretary to the Treasury, said the figures were good news as lending had increased by 20% over the past year as a result of the Merlin agreement, with lending to small business also up by 13%.
John Walker, national chairman of the Federation of Small Businesses, described the total figures as disappointing. He added: "It is even more disappointing, given that the Project Merlin targets were set artificially low in the first place.
Perhaps if the banks were to lower the cost of borrowing and play fair by the small business community then more money would be lent.
"As it is, more than a third of FSB members feel that they have missed their growth opportunities and fear being uncompetitive as a result of not being able to access finance," Walker added.
He called on the government to implement the credit easing scheme – intended to hand out £20bn of government guaranteed loans – that was promised in the chancellor's autumn statement.
The shadow business secretary, Chuka Umunna, warned that too many businesses were going under while the government continued to thrash out how credit easing would work.
"Last week we learned from the Bank of England that net lending to businesses has fallen by over £10bn in the last year and was negative in nine out of the last 12 months. As well as raising taxes and cutting spending too far and too fast, ministers are failing to get the banks to lend which is hitting business confidence, choking off growth and stalling job creation," Umunna said.
Individual banks scrambled to insist they had met their targets, which were based on gross lending rather than the net number that would show clearly whether there had been overall contraction of credit.
Bob Diamond, the Barclays chief executive, was publicly asked twice on Friday to provide details of the bank's performance on net lending and was unable to provide the information. He would only reveal that lending to all non-financial business was up 3%, compared with an industry-wide reduction of 5%.
"We really got on our horses to get businesses going," Diamond said.
Barclays later said net lending had been "flat" – that is the amount of new loans was the same as loans being repaid
Diamond expressed concern about the lack of confidence among businesses, which he said were holding high cash balances that they were refusing to spend.
He stressed that RBS, which has a market share of SME lending of around 28%, had been responsible for nearly half of all the loans to small businesses in 2011 – and that the bank had lent more than two and half times lent by its nearest rival, the bailed out Lloyds Banking Group.
John Maltby, commercial director at Lloyds, said the bank had lent £12.5bn to small businesses, against a target of £11.7bn. "We've grown our net lending during a time when, across the industry, net lending has slipped into reverse," Maltby said. Santander lent £4.3bn – exceeding the £4bn target, while HSBC said it had exceeded targets for £38.8bn of lending facilities to UK business customers and lent £11.7bn to small businesses.