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London - Britain's much-heralded scheme to encourage banks to make more credit available to households and businesses failed to boost lending in the second quarter, data showed, as banks focused on meeting tougher capital demands from regulators.
The Bank of England launched its Funding for Lending Scheme (FLS) in August 2012 as a key part of government efforts to stimulate the economy, with banks having since drawn down a total of £45.7bn of funding.
The scheme was tweaked last November to end incentives for mortgage lending with the intention of persuading banks to focus on businesses, but data from the Bank of England on Thursday showed that net lending to businesses fell by £3.9bn in the second quarter of this year, widening from a £2.7bn drop in the first quarter.
Lending to small businesses fell by £400m, though that was an improvement on a decline of £719m in the first quarter.
Britain's biggest banks have cut back on lending and shed assets to meet tough rules on capital that were imposed by regulators to prevent a repeat of the 2008 financial crisis. Banks have also pointed to a lack of demand from borrowers.
"Funding for Lending is failing to help the thousands of British businesses that need finance but can't access it," said James Meekings, co-founder of Funding Circle, one of Britain's biggest online lending platforms.
Alternative sources
"Instead, alternative sources of finance, like peer-to-peer lending, are proving to be a better way for the Government to get finance through to British businesses," Meekings added.
Fewer smaller businesses in Britain are using traditional forms of bank financing, such as overdrafts, loans and credit cards, a survey showed on Thursday.
The data showed that the biggest declines in lending came at state-backed Lloyds Banking Group and Royal Bank of Scotland, where net lending contracted by £2.1bn and £1.5bn respectively.
The decline at Lloyds was driven by a £2.45bn drop in lending to large companies. Lending to small businesses rose by £384m, making it the scheme's biggest provider of credit to small businesses.
RBS, which is majority owned by the British government, cut lending to big business by £1.13bn and to small businesses by £360m.
The biggest rise in net lending came at Santander UK, which lent £254m to businesses, including an increase of £99m for small businesses. The next-highest lender was new bank Aldermore, with net lending totalling £118m.
South Africa's Investec Bank increased net lending by £96m with a £136m increase in small business lending offsetting a £40m fall in lending to large companies.
The update covers the first full quarter since the changes to the scheme took effect in February.
