BoE retools lending scheme to help small firms

By William Schomberg and David Milliken

LONDON (Reuters) - Britain reworked its Funding for Lending Scheme on Wednesday in the hope of pumping more credit into small and medium-sized firms and injecting life into the country's stagnant economy.

The Bank and the Treasury said incentives to boost lending would be heavily skewed towards lending to smaller firms, which have failed to benefit much so far from other efforts to counter a credit squeeze in Britain.

Banks taking part in the scheme will also now be able to lend to alternative providers of credit such as leasing and factoring firms, which help small companies raise funding, as well as mortgage and housing credit corporations.

Under a third change, the period during which banks can get funding from the FLS will run for an additional year, until the end of January 2015, the Bank and the Treasury said in a joint statement.

The announcement comes a day before the release of first-quarter economic output data which could show Britain's economy slipping into its third recession in less than five years.

Chancellor George Osborne is also under pressure to find measures to boost growth, after the International Monetary Fund - previously a supporter of his austerity policies - said he may need to slow the pace of spending cuts.

Scotiabank economist Alan Clarke said the changes were not a game-changer for the struggling economy, which is three years into an austerity programme, and were probably a complement to more stimulus in the future by the Bank.

"It's clearly targeted at getting investment up," Clarke said. "I've not done the maths yet but I don't think it will be enough to offset the weakening in government spending and headwinds to consumers. But it prevents an even weaker outlook."

The original FLS was launched last August and offers banks cheap credit if they increase lending to households and businesses. Results have been mixed, with benefits so far mainly going to banks and homebuyers rather than small businesses.

"I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase," said the Bank Governor Mervyn King.

Osborne stressed the benefit for small business. "This innovative extension will now do even more for small and medium-sized businesses so that they can play their full part in creating new jobs," he said in a joint statement with King.

One of the changes announced on Wednesday seeks to get credit to small and medium-sized firms flowing as soon as possible: for every pound of additional lending by banks to the sector in the remainder of 2013, the amount of funding that banks will be able to draw upon increases by 10 pounds.

In 2014, that falls to five pounds of FLS funding for banks for every pound they lend to SMEs.

Lending to other sectors will count on a one-for-one basis towards the allowance for banks accessing the scheme.

(Editing by Catherine Evans)

Source: http://news.yahoo.com/uk-retools-flagship-credit-scheme-growth-going-again-050619852--finance.html

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