Anthony Carty: Shocking reduction in bank lending to businesses
We’ve known this for a long time. We hear it every day and a recent headline in a national paper hammered this reality home: “Bank lending to businesses in July fell away at an alarming rate.”
The paper in question quoted the British Bankers’ Association statistics that showed a £4.1 billion reduction in lending to non-financial companies.
While the Government has continued to trumpet their financing initiatives, a simple fact has emerged. Whether state-owned, state-supported or independent, banks in the United Kingdom have made a conscious decision to reduce the funds available to business.
It is the withdrawal of funds to manufacturers (accelerating from £400 million in June to £600 million in July against a three-month average of only £100 million) that is so shocking, with the industrial heartlands of the West Midlands at the epicentre of this funding drought.
The banks say they are lending, but the anecdotal stories from companies still indicate that they are hitting a brick wall when they approach their lenders.
So what is it that the banks know that we don’t?
With governments around the world pumping stimulus into their economies, it can only be a matter of time before this money finds its way into the system. Many dread that this will manifest itself in the form of dramatic inflation. This in itself would help the policy makers as the debt that each country has built up is effectively reduced with the effects of higher inflation. On a business and personal level it has a similar effect with the debt remaining constant, there are more “pounds” around to repay it. Debt is repaid, everyone is happy.
However, there is something more insidious at play.
Far from inflation, there are significant signs that the more likely effects of a protracted downturn will be deflation. Some argue that this crisis has been more severe and deeper than we think and that any recovery is still along way off. In a deflationary situation, no-one can put up their prices. They are forced to compete by continually dropping them instead. This loss of pricing power is much more harmful to both borrowers and to lenders than inflation.
As pricing power is reduced, profits become harder and harder for companies to earn. In this environment a lender (the banks) need to reduce their exposure to any, even remotely vulnerable company.
Of course, we will have to wait and see how this unfolds. But with all the guarantees that are available, all the support from the Government, they continue to withdraw funding from vulnerable companies. Something’s fishy.
Anthony Carty is a director at Clifton Asset Management plc www.cliftonasset.co.uk