RBS and Lloyds defend lending policies

Part-nationalised UK banks Royal Bank of Scotland (RBS) and Lloyds Banking Group defended lending policies today amid claims the duo are hitting firms with high loan rates.

Their response came after the Financial Times reported Government concerns over “unrealistic” rates following recent scrutiny of their pricing mechanisms for loans.

Under the terms of the two banks’ participation in a taxpayer-backed insurance scheme for toxic debts, the duo have made lending commitments to businesses and homeowners totalling £39bn this year.

While both are on track to meet mortgage lending targets, the banks have said corporate loan targets will be tougher because firms are looking to clear debts rather than take on more borrowing during the recession.

The Treasury – which meets regularly with the two banks – is understood to be unconvinced that a lack of demand rather than the pricing of the loans – is the key issue. A spokesman said: “The lending commitments must be met.”

In the first half of 2009, RBS made £28.6bn in gross loans to business but net lending was down £7.3bn because customers paid back more. Lloyds’ interim figures also showed corporate lending contracting by £18bn compared with a year earlier.

Despite the fall in lending, RBS – which has around 30% of the UK small business lending market – said it was “ready, willing and able to lend to meet creditworthy demand where it exists”.

The group declined to comment on the reports of the probe into its lending criteria but said it was approving 85% of all credit applications and providing new loans to over 5,000 firms a week.

Lloyds said it “was playing its part in the UK’s economic recovery” with “competitively priced” products for small firms. It has also made specific commitments to customers through a Small Business Charter, such as passing on interest rates cuts.

Results from both banks showed their net interest margin – the spread between the interest earned on loans and paid out to savers – shrinking in the first half. Higher loan prices were more than offset by higher funding costs and lower deposit margins.

Lloyds is said to be considering a possible alternative to taking part in the Government’s Asset Protection Scheme by raising £25bn to strengthen its capital base. Avoiding the APS would be likely to reduce its lending commitments.