A flagship Government scheme to kickstart the economy will be rendered obsolete when an £80 billion lending initiative kicks off, it has been claimed.
The Funding for Lending scheme, devised by the Bank of England and the Treasury, will offer money to banks on condition they pass it on to businesses and households in the form of cheaper loans and mortgages.
It was reported that the launch will effectively supersede an existing £20 billion flagship National Loan Guarantee Scheme (NLGS), also known as credit easing, to encourage banks to lend to small businesses.
Treasury officials have told bankers the scheme, unveiled in March, will be quietly abandoned although not officially axed, according to Sky News.
There are fears that the loans made available to small businesses under the Funding for Lending scheme will be less affordable than those under the credit easing scheme because there is no obligation for banks to pass on a discount from the Government.
Labour claimed that would be a further blow to Chancellor George Osborne after he announced in June that the scheme was to be extended to allow larger businesses to take part. Shadow Treasury minister Chris Leslie said: "If the National Loan Guarantee Scheme was always supposed to be replaced by the new Funding for Lending scheme, then why, two weeks after that new scheme was announced, did George Osborne say that the NLGS would be extended?"
The initiatives to boost lending to businesses and households are of critical importance to the Government's attempts to revive the economy from the longest double-dip recession in more than 50 years. The Government borrows at relatively low rates as a result of the UK's perceived safe-haven status from eurozone turmoil and it is hoping to take advantage of its low borrowing costs to stimulate the banks to lend. But there are fears that its schemes do not address the underlying problems of a lack of demand for credit in the wake of the financial crisis.
In June, the Chancellor said 10,000 loans worth more than £1.5 billion have been offered to businesses in the first three months of the credit easing scheme. The scheme was initially made available to businesses with a turnover of £50 million but he said those with a turnover of £250 million would be included, meaning 99.9% of firms were eligible.
It also unveiled the Funding for Lending scheme in June, which was supposed to act as an additional boost to the economy. Under the scheme, British banks, which are facing higher funding costs and are under pressure to put more capital aside, will be offered vital funding at low interest rates. But the funding will be linked to bank lending performance in a direct attempt to free up the log-jam in credit hitting the economy.
John Walker, national chairman of the Federation of Small Businesses, said: "The main objective for any Government-backed scheme should be to ensure that the finance actually gets through to small firms. Four in 10 small firms were refused in the second quarter and this needs to change if the economy is to grow. Communication will be key - whatever the name of the scheme - to ensure that businesses actually benefit from it."
The Press Association, photo by wwarby