Merryn's Blog

Targets or no, bank lending could still shrink next year

The Chancellor's Budget promise to force RBS and Lloyds to lend £94bn to small businesses next year sounds like a good thing. There's just one small problem…

As our regular columnist James Ferguson is always pointing out, you can't have a healthily growing economy if your banks are contracting lending.

So Alistair Darling's Budget promise to force RBS and Lloyds to lend £94bn in total to small businesses in the coming financial year sounds like it might be a good thing.

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And that target sounds bold, when you compare it to the targets of £16bn for RBS and £11bn for Lloyds that were put in place last year. Especially when you realise that the banks in question didn't manage to hit those targets.

There's just one problem. The earlier targets were for net lending. In other words, the banks had to lend out more than they recouped in repayments. But the £94bn target is for gross lending.

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In other words, the banks could be shrinking loans, and still hit the targets. How? Because if businesses pay back more than £94bn, then net lending could end up shrinking.

Now, I don't have any problem with the banks shrinking lending. If they don't believe businesses are creditworthy, and their own balance sheets are in a mess, then that's just what has to happen.

But the fact that we have to unpick this target and explain it to you just goes to show what a lot of dishonest window dressing Budgets consist of. And I'm sure there's plenty more where that came from.

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