Recovery is being hampered because of banks' reluctance to give loans to SMEs, says business secretary
Vince Cable, the business secretary, has warned that innovative firms that are central to restoring growth are trapped in a "valley of death", unable to raise funds from banks that are disconnected from the real economy.
Delivering the Mansion House speech he also defended his leaked letter to David Cameron, in which he warned that the coalition government had no vision about growth. He did so as Cameron rejected one of Cable's specific proposals in his letter, which called for part of RBS to be spun off to create a national investment bank to provide funds to businesses.
Cable admitted that his idea was a long-term solution and faced technical difficulties. He said: "It would almost certainly be necessary to lengthen the period in public ownership. It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance. And even if they did these things, we would run into problems with EU state aid clearance."
Criticising the banks' reluctance to provide credit, he said: "Several years after the crash, we still have a big headache." He said there was a yawning mismatch between the banks and the needs of business.
He pointed out: "The governor of the Bank of England warned only last week that lending to small companies was the one piece of the puzzle missing for recovery," said Cable.
"And although the approval rate of bank loans is high – 75% for SMEs [small and medium-sized enterprises] – business remains frustrated by lack of access to capital of all kinds. The small number who actually get rejected are outnumbered by those who never try, perhaps scarred by recent experience or simply scared of what might go wrong. For those who do get a loan, the frustration is often about cost and conditions."
He said: "Banks are trying to reduce risk. But business lending, especially to SMEs, is risky. Exporting to emerging markets is risky. Innovation is risky. I hardly need to tell a room full of successful business people that a flight from risk is a flight from business."
He argued: "Britain's recovery is being imperilled by the parlous state of the very institutions that caused the crisis in the first place.
"Wherever I meet groups of business people around the country I am given fresh anecdotes about how hard it is to deal with the banks, how few choices there are, how swift and arbitrary the treatment can seem. I hear this weekly in my constituency surgery. I hear it from academics, business titans and even the right-wing tabloid press, usually the first to scold politicians like me for interfering in business."
He said the solutions included doing nothing, reducing tough capital requirements on banks, browbeating banks to lend more to business or forcing state-owned banks to lend more.
The focus, he said, remained on a credit scheme for small businesses, which he said should be ready before the budget.