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At the Conservative Party Conference, the Chancellor of the Exchequer stated he is looking at “ways to inject money directly into parts of the economy that needs it such as small businesses. It’s known as credit easing.”
In Credit where it’s due: easing marginal lending decisions to SMEs, published on Wednesday 23 November, James Conway and Michael O’Connor review evidence of whether this is necessary or desirable.
But it is unclear the extent to which this is a supply or demand issue:
Restoring SME confidence in the availability of financing for viable projects will be crucial to the growth of this sector as the economy recovers. In addition, pressures on banks to rebuild balance sheets and to build up capital requirements may also reduce the readiness of banks to make loans to SMEs, particularly as this sector of the economy is seen to be the most risky.
The authors therefore conclude that government could ease marginal lending decisions currently rejected by banks.
This approach would unlock a minimum of £25 billion of investment in SMEs for every £5 billion provided by the government. In addition, as a portfolio of the government’s mezzanine loans would be an attractive investment opportunity for the private sector, it should be easily saleable. The original funding could thus be quickly repaid to the government; or it could be used to launch a second phase of the Ignition Capital Scheme.
The authors review other credit easing options, concluding that the mezzanine proposal presents the potentially most effective whilst curbing risk:
Tim Knox, Director of the CPS, comments: “Micro-initiatives will not solve the problems of SME financing. Demand for loans is uncertain. The grave weaknesses of the government finances, and general economic uncertainty, must suggest a simpler and bolder solution which is flexible to the true level of demand for business loans for viable SME propositions.”
The authors are available for interview or comment. Please contact me to make the necessary arrangements.