Now banks must restore local lending powers to play their part in financing economic recovery, says business group
  21 January 2011    
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The Forum of Private Business is joining the Campaign for Community Banking Services (CCBS) and calling on banks to restore local services – including powers to make commercial lending decisions – in order to help small firms access affordable finance.
 

The call comes after the CCBS revealed that the UK's traditional high street banks are systematically closing branches across the country.

Since 2000, according to the CCBS, 2213 branches have closed – almost one in five (18%) of all local banks. From 1990 that figure is 7388, or 43% of all branches.

In 2010 alone 109 Barclays, HSBC, Lloyds TSB and NatWest community branches were closed. So far in the first quarter of 2011 nine further HSBC, ten Lloyds and eight Barclays branches are closing and there are indications that many more closures are to come.

The implications for business-bank relationships and decision-making based on real knowledge of local businesses are clear. In its submission to the ‘Government Assistance to Industry' consultation, the Forum is calling for greater discretion on lending decisions for local bank managers along with other measures to improve the flow of credit to small firms.

Further, the Forum's submitted research to the Office of Fair Trading (OFT) as part of its review of barriers to entry, expansion and exit in retail banking. A quarter of respondents (25%) said ‘quality of relationship with a bank manger' was a key factor behind choosing a bank. One in five (20%) said their main motivation for switching banks was that their local bank manager was not accessible. In all, 21% said a good relationship with their bank manger was the main reason they decided not to switch.

The move by the Forum and the CCBS follows a series of initiatives aimed at empowering small businesses to proactively take control of their own financial management – and take steps to establish that they are financially viable and creditworthy.

These include Doing Business Together (DBT), a project that is being backed by prominent members of the Government such as the Minister for Business and Enterprise, Mark Prisk, and representatives from organisations including Lloyds Banking Group, the Institute of Credit Management (ICM) and the Association of Chartered Certified Accountants (ACCA).

"Our members are frustrated at what they see as a creeping tendency towards over-centralised decision-making within banks that does not consider their businesses on their own merits but is more often based on factors such as the sector they are in," said Phil Orford, Chief Executive of the Forum of Private Business.

"There must be a commitment to restore local business lending powers so risk can be gauged on a case-by-case basis rather than the one-size-fits-all, tick-box mentality we are seeing now."

Mr Orford added: "However, it is true that many small businesses need to up their game in managing their financial information in order to prove to banks they are creditworthy.

"Achieving this is not only important for financing private sector-led economic growth, it also forms a fundamental part of our plans to get Britain trading profitably again. We are working on a series of initiatives effectively helping business owners help themselves to access the finance they need for success in 2011 and beyond.

"We have taken definite steps forward in improving co-operation, communication and transparency between business and the banks. But this is a two-way process. Now, it is the turn of lenders to show they are willing to co-operate and commit to working with small firms by being more open about the processes behind lending decisions and risk management."

Derek French, Director of the CCBS, explained why smaller businesses are particularly vulnerable to banks' increasing centralisation.

"Businesses, more than any other sector of bank customers, need convenient branch counters and this is particularly relevant to retailers dealing in cash and cheques," said Mr French.

"Accordingly, the resumption of branch closures, particularly the ‘last bank in town' by the four traditional high street banks, should be of real concern to the SME sector.

"When local banks close in a community, business and other users from the surrounding area go elsewhere to bank and take their local spend with them – to the detriment of the community's retailers.

"Further, centralising business managers for an area, coupled with the loss of local branches in the less affluent parts of town, has meant that those business managers tend to put effort into the parts of town where they can more easily meet their targets rather than on the businesses that really need finance, and there is no pressure from a local branch presence to change that approach."

Mr French added: "This does not need to happen. There are alternatives, such as neutral shared branching – ‘the community bank' providing a front end service to customers of all banks. This has been academically validated here as "operationally feasible and financially viable" and successfully operates throughout the United States.
"The banking industry has failed to properly trial neutral shared branching and successive governments have failed to impose obligations on banks to service communities adequately in the manner of the US Community Reinvestment Act."

Amid reports that the Independent Commission on Baking established by the coalition Government is to consider recommending a public service obligation on banks with dominant market shares of personal and small business current accounts, Mr French warned that this would come too late for many businesses and communities throughout the UK.

According to the Forum's recent ‘Economy Watch' member panel survey, firms expect they will need 20% more finance for development in 2011.

However, the research revealed that the amount business expect to source from external sources – predominantly traditional bank lending – has seen a 27% slump. Correspondingly, the amount business owners expect to come from internal reserves and sources – such as directors, friends and family members – has increased markedly from 10% in 2010 to 45% for 2011.

There is a strong demand from small businesses for affordable commercial finance. The DBT initiative aims to encourage a relationship between finance providers and small businesses that is based on ‘profitable partnership through a shared commitment to the principles of honesty and transparency'.

The project will launch with a series of regional events involving luminaries including senior members of the Government.

The Forum of Private Business, which is also working with organisations such as Funding Circle and Funding Store as part of its Finance Director business support solution, and which in February will officially launch its major Get Britain Trading campaign, was instrumental in formulating DBT's operating principles.

Doing Business Together – operating principles in full

Small business systems of financial reporting are more likely to produce relevant and reliable financial information if:

- Management communicates sound ethical values within the business and exercises sufficient oversight of activities.

- Sufficient competent human and other resources are used.

- The systems are designed to achieve the business's specific financial reporting objectives.

- Risks of not meeting objectives are identified and mitigated by suitable policies and procedures.

- The performance of systems is monitored and corrected or improved as necessary.


Information from providers of finance about process and decision making is appropriate if it:

- Explains what finance may be sought and on what terms.

- Identifies factors that determine credit ratings or lending decisions.

- Sets out the general processes and timetable.

- Refers to appropriate regulations/industry codes where these are followed.

- Communicates, in respect of an application or facility, the specific processes and timetable applied and the reasons for decisions.
 


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