British merger partners Lloyds TSB and HBOS pledged to pass on interest rate cuts or increase lending to small businesses as banks were blamed for turning off credit and urged to boost lending in the face of recession.
Politicians and small business lobby groups have blamed banks for cutting credit and some companies in a survey of UK services firms on Wednesday said lenders had tightened terms over the past month.
The services sector shrank last month at its fastest pace since the series began in 1996, the data showed, stoking concern that a lack of credit is deepening economic problems.
UK Prime Minister Gordon Brown will later on Wednesday outline plans to strengthen the banking system to help maintain the supply of loans to credit-starved small firms and families to help them through a recession. It will be part of his slate for 2009, set out in the traditional speech to parliament by Queen Elizabeth.
Lloyds promised to pass on in full any reductions in base interest rates in 2008 and 2009 to small- and medium-sized enterprises (SMEs) as part of a six-point charter to help them weather the current economic downturn.
HBOS, the bank Lloyds is taking over, separately said it would use 250 million pounds ($371.7 million) of European funding to provide more attractive lending facilities to SMEs.
LENDING OR NOT?
The government is providing up to 17 billion pounds to Lloyds and HBOS as part of its bank rescue plan and is stepping up the pressure on all lenders to keep credit flowing. It has warned they could face full nationalisation if they do not do so.
Major banks say they are lending more to small businesses than in recent years, and loans to small businesses grew 1.8 percent, or almost 1 billion pounds, in the third quarter, according to British Bankers' Association data.
But the PMI data backed up complaints from small business lobby groups and anecdotal evidence suggesting credit has been turned off, with industries complaining that overdrafts have been cut and charges increased.
"The banks are caught between the internal pressures to reduce lending given the deteriorating economy and tightening credit models, and the government's stated need to keep lending at previous levels," said Sandy Chen, analyst at Panmure.
"The risk is if they meet the government's demands by increasing loans it might lead to a bigger bad debt problem a couple of months down the line," Chen said.
Lloyds, which has over 600,000 small business customers, said as part of its plan it will maintain overdraft limits and overdraft margins at existing levels for SME customers.
The bank said it will also agree to any reasonable request for short-term finance and do what it can to support any viable business through temporary difficulties.
HBOS said funding from the European Investment Bank (EIB) would enable its Bank of Scotland arm to provide company loans to its customers at a significant discount — up to 80 basis points — to standard rates.
The Edinburgh-based bank said it was working with the EIB, the EU's lending arm, to define how the funding will be made available to customers.
European Union finance ministers on Tuesday agreed to boost the capital of the EIB so it can finance new projects to fight recession across the region.
