Project Merlin is no magic fix to lending

Whether it is because they are perceived as architects of the financial crisis, pay gratuitous bonuses, or have returned to bumper profits, the UK’s four largest banks (RBS, HSBC, Lloyds and Barclays) unveiled combined annual profits of almost £25bn for 2010. Bankers make easy figures of hate while the rest of us remain in the economic doldrums. However, the main criticism levelled at banks by finance directors of small- to mid-sized businesses is that they continue to withhold credit from them.

There is a healthy dose of scepticism among finance directors that the deal between the government and the UK's biggest banks on lending and bonuses, dubbed Project Merlin, will produce the dose of magic needed to kickstart lending to the businesses that need it most.

As part of the agreement, the four biggest UK banks, and Spanish group Santander, commit to making £190bn of credit available to businesses in 2011, of which £79bn has been earmarked for SMEs. This equates to a 15 percent increase on the £66bn lent to SMEs in 2010.

So far, the signs are not promising. Data from the Bank of England for December 2010 showed the net change in loans to businesses fell again, meaning that net credit fell back in all but two months last year. Meanwhile, a survey produced by the manufacturers’ organisation EEF in March showed the cost of credit has been increasing in 2011 too.

“The improvement we saw in lending towards the end of last year seems to have been short-lived. While there appears to have been some easing in availability, the question for many smaller companies is still at what cost and under what terms,” says EEF chief economist Lee Hopley. “It is far from clear that we are on the path to easier access to more affordable finance.”

Therein lies the problem. Project Merlin makes it plain that the banks’ position on lending will be “subject to normal commercial objectives”. This means that while money will be made available, the banks do not actually have to lend it and, more importantly, they can charge what they like to do so.

One FD tells Financial Director that, though he could get funding, the banks “charged the earth”, while another FD of a building products company that recently switched banks to secure a funding package tells a similar story.

“We never had an issue with the facility; it was the pricing structure with which we had an issue,” the FD, who asked not to be named, tells Financial Director.

According to the banks, it is business as usual. Speaking at the launch of the Finance Directors Planning Forum in March, Mark Berrisford-Smith, senior economist in the business economics unit at HSBC, said that he had not spoken to any colleagues that had their “door battered down with people asking for money” and that the banks’ lending criteria are the same as they always were.

“We lend money to viable businesses with good management - end of story,” said Berrisford-Smith.

The eye of the beholder

The definition of what makes something viable is the main point of contention. Banks interpret viability in a conservative way, and their opinion may be very different from the interpretation of SME finance directors.

As a general rule of thumb, the main requirements for a viable business are the presence of a good management team, strong financial controls, a sensible capital structure, a contingency plan and a strong product or service. But the interpretation of what it means to be viable remains a matter of opinion.

“The banks need a lot more convincing that the business is viable, but that is very much in the eye of the beholder,” says Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW).