SME lending in the run up and aftermath of the pandemic
From 2017 to the start of the pandemic, all of the net growth in SME lending came from smaller banks or from alternative sources such as peer-to-peer lending. The pandemic reversed that trend and strengthened the dominance of the largest high-street banks – but having grown their SME lending so much during the pandemic will these large banks be willing to grow their lending further to support the recovery? Only time will tell, but experience suggests that promoting a diversity of lenders with different business models can help promote the availability of finance to SMEs.
As the UK economy recovers from the pandemic, maintaining and increasing the supply of SME finance to all regions of the UK is seen as vital for meeting the forecasts of unprecedented economic growth and the Government’s ambitions for levelling up. Below are four possibilities which could.
Vary regional SME funding to help specific regions to level up
The first stage is to place improving access to finance for SMEs as central for the levelling up agenda. The APPG called for the Government to develop a coherent strategy based on a holistic assessment of how finance needs to be transformed in order to level up. Policy interventions to support this could include:
Altering the incentives on larger and challenger banks to lend to specific regions.
The first set of policy proposals would alter the incentives of larger banks to lend to specific regions. The SME support factor is an adjustment to the capital requirements for SME loans intended to support SME lending. The SME support factor will cease at end 2022, seeing a potential 30% increase in the capital requirements for SME lending, and thereby a reduction in the supply of finance to SMEs by banks. The term funding scheme put in place by the Bank of England provided funding for banks which increased their SME lending but is scheduled to end in October 2021. Interventions could include:
Promoting the growth of challenger banks and changing regulation to support levelling up
There have also been complaints of disproportionate regulation for alternative lenders such as CDFIs and challenger banks is hampering their growth. The Bank of England has been consulting on a new strong and simple prudential framework for non-systemic banks. The APPG called for a renewed effort to turbocharge the challenger bank and non-bank lending sector:
Promoting the growth of regional institutions
Given all of the characteristics of the banking market identified above, levelling up will have to mean some form of support for smaller and lenders and new forms of institutions such as regional mutual banks and Community Development Financial Institutions (CDFIs). 90% of businesses which CDFIs lend to have been rejected for finance by a bank, and they lend disproportionately more to typically underserved groups. The APPG wants to strengthen the role played by more relationship models of banking and finance with recommendations to deliver a strong local finance option for every business in the UK including: