Banks have put a damper on George Osborne’s hopes that an expansion of the Funding for Lending Scheme will spark a rush of credit to small and medium-sized companies as the chancellor finalises plans to revamp the programme.
Mr Osborne and the Bank of England will announce an extension of the scheme within the next two weeks amid mounting pressure on policy makers to boost growth.
Ministers and many businesses have blamed shortage of credit for holding back recovery, with data on Thursday expected to show the economy at best narrowly avoiding a triple-dip recession in the first quarter.
Banks welcomed the move to boost FLS but warned it would not on its own clear the credit bottleneck.
“If it were to be extended I think that would be helpful, but it is not a panacea,” said Stephen Pegge, SME markets director at Lloyds Banking Group.
Other banks issued similar warnings highlighting weak demand for credit from cautious households and businesses as the biggest obstacle to lending.
Officials from the Bank of England and Treasury have drawn up a plan to extend the FLS scheme by a year to 2015 and also expand it beyond the major high street banks.
Those who could become eligible include invoice finance houses, leasing firms and asset finance groups which are a major source of credit to smaller companies. Asset finance typically works by letting companies borrow against machinery, premises or invoices.
Chuka Umunna, shadow business secretary, welcomed the changes to scheme but said they were proof that it had partially failed so far. “The principle problem with this scheme is that it has reduced the cost of borrowing for businesses that can already get finance but has not improved access to finance for profitable businesses that can’t get loans at the moment,” he said. “It has been a failure on that front.”
The extension of FLS will be announced before officials from the International Monetary Fund arrive for their annual mission to the UK on May 8, Treasury officials told the Financial Times.
The Treasury hopes that, by supporting growth, the extension of FLS might give the IMF a reason not to criticise the chancellor’s deficit reduction plans after the visit.
In Washington last week, the fund said Britain “should consider” imposing less austerity in the face of weak private sector demand and officials indicated they would only change their mind if the Treasury could convince them they had a plan to restore expansion.
In the Group of 20 meeting, British officials pointed out to the IMF that the Budget had contained the Help to Buy scheme for mortgages about which they said IMF staff were unaware.
Mr Osborne said: “What the IMF asked us to do last year was to show flexibility and credibility and …I demonstrated that flexibility by not chasing the debt target by taking additional measures to support the economy like the housing scheme.”
Neither IMF officials nor the Treasury are confident they can come to a meeting of minds that will avoid direct criticism of policy. The IMF was incensed that aides to Mr Osborne suggested that its attitude came about only because the UK was a pawn in a wider argument in the fund over US fiscal policy.
Many officials told the FT that the fund had for a long time said the government should consider slower deficit reduction if growth fell short and had little choice in following through with the recommendations after two years of stagnation. Only if the growth figures on Thursday were strong could the fund easily give the UK a clean bill of health, they said.
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