New Funding for Lending rules fail to improve business lending

The scheme was refocused on business lending to encourage a more sustainable recovery, less weighted towards consumer spending. Under the new terms of the scheme, which applied from the start of February, banks can borrow £5 from the BoE for every pound they lent out. When the FLS applied to both consumer and business lending, banks could borrow £10 for every pound of business lending.

However, in the first quarter that the new rules applied, net lending to businesses - the amount of money banks are currently lending out under the scheme - fell by £2.66bn.

This was made up of a £2.1bn fall in lending to large corporates and £723m to small and medium-sized businesses. Net lending to alternative lenders rose by £180m.

The BoE pointed out that the majority of the fall was due to declines in commercial real estate lending.

Of the banks using the scheme, Lloyds Banking Group was responsible for almost all of the drawdowns in the first quarter - accounting for £2bn of the £2.012bn in total. Lloyds increased net lending to small businesses by £536m in the period, although a fall in lending to large corporates meant total net lending was down £2bn.

Royal Bank of Scotland reduced small business lending by £737m and increased lending to corporates by £774m.

"The figures could be worse were it not for the extension of FLS, which increased the incentives for lending to small businesses in particular," said Phil Orford, chief executive of the Forum of Private Business.

"At a sectoral level some of the decline in lending is down to reduced appetite to lend to the real estate sector so for the rest of the economy the picture is slightly brighter. At a time when the economy is picking up there is no doubt the figures remain slightly disappointing."

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