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Banks' failure to lend to SMEs 'holding back economy'

More than five years after the start of the financial crisis, the supply of credit to SMEs remains tight and a lack of bank lending to these firms is hindering the wider economy, according to a Government-commissioned report.

The study by the independent National Institute of Economic and Social Research (NIESR) for the Department of Business, Innovation & Skills (BIS) found that rejection rates for SMEs are were generally higher in 2011-12 than 2008-09.

Furthermore, it is low and average risk SMEs that have suffered from the tightening of credit, rather than high-risk enterprises.

The report noted that since 2011, there has been a particular tightening of terms on renewals, which may reflect "poor lending decisions made for the original financing during the boom up to 2007".

According to the Telegraph, the full NIESR report, which was delivered to BIS this morning, says although demand for credit is "probably" subdued, this is largely because of a "high level of discouragement from application" along with high borrowing costs and the fact that cuts to the base rate have not been passed on by the banks.

But a spokesman for the British Bankers' Association (BBA) told EN that high street lenders are "committed to helping small and medium-sized businesses in these difficult economic times".

"They are currently offering some of the lowest interest rates for customers in history and there should be no doubt that now is a good time for businesses to go and see their bank if they want to borrow," they added.

"As the BBA's figures on business borrowing that we released in March show, application approval rates are nearly 80 per cent for small businesses and 90 per cent for medium-sized businesses with £6bn of new lending per quarter. Businesses have over £15bn of borrowing available to them that they are not currently using and they are sitting on cash reserves of over £125bn, a six per cent increase since 2011. This shows that demand for borrowing is understandably muted - in difficult economic times many households and businesses are looking to pay down debts rather than take on more borrowing."

The BBA also insisted that it is gloomy economic conditions and misconceptions, rather than banks' intransigence over lending, that is holding back SMEs.

"The latest survey of SMEs shows that more than three times as many businesses saw the current poor economic climate as a major obstacle to expansion compared to the numbers citing difficulties in accessing finance," they said.

"It also found that large numbers of businesses who want finance never ask their bank because they think they would be turned down. That is why the banks are working hard to restore confidence through initiatives such as building a UK-wide network of business mentors, offering an independently monitored appeals process for businesses whose borrowing applications have been declined, and working with alternative finance providers to provide access to different products."

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