Bank of England extends Funding for Lending support for SMEs

The government and Bank of England have confirmed the extension to the Funding for Lending (FLS) scheme to ease the flow of credit via support for smaller businesses.

The scheme to allow lenders to borrow at a cheap rate from the central bank was launched in 2012 and was due to end in January, but the new extension until 31 January 2018 will see a continued tapering of borrowing support until then, for now being focus on improving credit conditions for small and medium-sized enterprises (SMEs).

Borrowing allowances for banks will be cut by 25% after six months, and by the same amount every six months until the scheme closes, which the Bank said ill mean that funding will continue to remain available to support further improvements in SME credit conditions.

The FLS has been credited with a substantial fall in bank funding costs since in 2012, which the BOE said had fed through to improvements in credit conditions for households and businesses.

Data released on the same day showed consumer credit rose 8.2% year-on-year, matching September’s nine-and-a-half-year high, but the month-on-month rise of £1.18bn was slightly less than forecast.

BoE Governor Mark Carney said as conditions have normalised for particular sectors over the life of the FLS, the Bank has reduced the scope of the scheme and focused support where it was needed most, which was now SMEs.

"The announcement today continues that tapering, supporting continued improvement in SME credit conditions as the economic recovery takes hold, while gradually withdrawing that support over the next two years."

Chancellor George Osborne added: "Given the improvement we’ve seen in credit conditions for households and large businesses, as our long-term economic plan moves from rescue to rebuild it is right that we continue to focus the scheme’s firepower on the small businesses that are the lifeblood of the economy."

The BoE pointed out that SME lending volumes have increased by £2.1bn in 2015 so far, and net lending to SMEs by FLS participants was positive in the first two quarters of 2015.

However, the Bank noted that credit conditions for SMEs continued to remain noticeably tighter than for large corporations.

The Treasury and the Bank are also looking to tackle longer term structural constraints on SME lending with measures including widening access to credit data to improve the quality of credit scores provided to trade creditors; the joint Bank of England-ECB initiative to improve the functioning of the securitisation markets, including securitisation of SME loans; and the continued expansion of the activities of the British Business Bank to support access to finance for SMEs.