UK business lending shrinks by £3.5bn

Business lending contracted by £3.5bn (4.26bn) in June as small firms again felt the brunt of tighter credit conditions, the Bank of England said today.

The net repayment was bigger than the £2.2bn (€2.67bn)seen in May while lending by major banks in July “remained weak”, the Bank’s latest Trends in Lending report said.

While most companies are seeking to pay down debts in the wake of recession, smaller firms are being hit because they have fewer alternative sources of funding than large multinationals.

“Contacts of the Bank’s network of agents noted that credit conditions for smaller businesses remained tighter than for large corporates,” the report said.

“Some major UK lenders expected demand from SMEs to remain muted in the coming months,” it added.

The spread, or profit, made by banks on loans to bigger firms fell slightly between April and June but was “little changed” for small and medium-sized firms.

The gloomy picture on credit will add to concerns over a stalling recovery in the months ahead after stellar 1.1% GDP growth in the second quarter of this year.

Last week, Bank Governor Mervyn King downgraded UK growth forecasts to reflect the impact of the Chancellor’s emergency Budget, which kicks in next year with a deficit-busting crackdown on public spending.

The Bank has slashed interest rates to a record low of 0.5% and pumped £200bn (€243.5bn) into the economy through quantitative easing – buying up assets with newly-created money – to boost the money supply.

But further provisional data showed annual growth in M4 or “broad money” - bank and building society deposits and cash – falling to 2.3% in July, the lowest level since 1983.

Although the Bank will publish more detailed data next week, the provisional figures hint at a slowdown in its preferred measure of money growth. Rate-setters want this rising at an annual rate of near 10%, although growth slowed to 6% in June.

Annual growth in lending also slowed to 0.5% year on year, today’s figures showed – the fourth monthly fall in a row.