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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

Is another bank mis-selling scandal brewing?

 

The full extent of the banks’ questionable behaviour following the 2008 crash has seemingly not yet played out as suggestions of yet another possible mis-selling activity surface.

Many SMEs are still awaiting compensation after being mis-sold insurance in the form of hedging products to protect them from potential interest rate rises.  Libor rate rigging is still under investigation and the recently-published Tomlinson report has prompted Business Secretary Vince Cable to refer RBS’ approach to dealing with companies in financial difficulty for investigation by the Financial Conduct Authority and the Prudential Regulation Authority.

Mr Cable is plainly going to be an even busier man following recent revelations in the Sunday Mail, the FT and the Times, that banks may also have been taking advantage of the Government’s five year-old Enterprise Finance Guarantee (EFG) scheme whereby they may have sought to repair their balance sheets at their SME clients’ expense.

Reportedly some SMEs have had their overdrafts cancelled by their banks who have then offered loans under the EFG scheme. The benefit for banks is that EFG loans do not require the same level of reserve capital as overdrafts but it is not clear whether this was the reason behind the withdrawal of overdrafts.

It seems that many banks have not fully explained the terms of an EFG loan.  Loans under the EFG scheme are intended for businesses that do not have sufficient assets or track record for a conventional loan where the scheme guarantees the bank 75% of any loans should the borrower’s business fail.

Unfortunately, many SMEs appear to have been given the idea that should they fail they would only be liable for repayment of 25% of the outstanding debt.  In fact they are liable for the full amount and the banks get the 75% from the Government ONLY after they have exhausted the recovery terms of the EFG loan which require security over the business assets and personal guarantees from director/shareholders. As such the government only pays out under the scheme after the company is formally declared insolvent and the guarantors are made bankrupt.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting General

Banks need an incentive to lend to Entrepreneurs and SMEs

Despite government rhetoric and its promotion of initiatives to encourage bank lending to entrepreneurs and SMEs the banks aren’t lending.
Merlin is a joke and contributes almost nothing to stimulating growth or an entrepreneurial culture in UK.
The root of the problem is banks’ inability to lend to businesses with few assets.
The Enterprise Finance Guarantee (EFG) scheme has not worked and nor will the new National Loan Guarantee Scheme (NLGS) initiative because lending because neither is underwritten by a Government guarantee, thereby exposing the banks to the full credit risks.
How different from the Small Firms Loan Guarantee Scheme (SFLGS) launched in 1981 to stimulate lending to SMEs, where the government provided a guarantee to the banks to support the lending.
The conception of the EFG and NLGS appears to convey a Government guarantee, however it doesn’t and this is why the banks are not lending under these schemes.
The SFLGS provided for a government guarantee to the lending bank of 85% of unsecured loans to qualifying SMEs who could borrow up to £250,000 (70% for companies under 2 years old).  During the 1980s – 90s the SFLGS contributed to stunning growth, helping to encourage entrepreneurs to set up and grow their business.
It was scrapped by Gordon Brown in 2006; a nail in UK’s entrepreneurial coffin, and such prescient timing.
Banks have the funds and the distribution networks, but they should not be exposing themselves to risky or unrecoverable debt and therefore are rightly wary of unsecured loans.
They need to be incentivised to lend to SMEs. Their loans need to be underwritten and the government is the only such source. Bring back the SFLGS.