Sky News - Net Lending Falls by £300m As Banks Cut Loans

Business leaders express concerns about a lack of credit to small firms, and call for more competition among lenders.

The Bank of England projects a pick-up in lending later this year

The number of loans offered to businesses has fallen - despite lenders drawing down billions from a state-subsidised cheap credit scheme designed to revitalise Britain's sluggish economy.

The Bank of England reported a £300m fall in net lending by banks and building societies taking part in its flagship Funding for Lending Scheme in the first three months of 2013.

Part-nationalised Lloyds Banking Group lent almost £1bn less during the quarter, despite having borrowed £3bn from the project.

Taxpayer-backed Royal Bank of Scotland also shrunk its net lending by £1.6bn in the quarter, but has borrowed £750m from the Bank of England and Treasury scheme.

Spanish-owned bank Santander cut its net lending by £2.3bn as it continued its retreat from riskier parts of the mortgage market.

The FLS offers lenders discounted loans in return for boosting the flow of credit to the economy, and was recently beefed up to extend more loans to credit-starved small businesses after criticism over its impact.

Three banks - Lloyds, RBS and Santander - cut their credit to the economy

While the scheme has been deemed a success in terms of cutting the mortgage rates for first-time buyers, it has so far failed to boost net lending to businesses.

Since the introduction of the scheme £16.5bn has been issued to banks, while net lending has dropped by £1.8bn during the same period.

The BoE blamed the credit squeeze on lenders shrinking their "non-core" portfolios, such as commercial property loans.

It did not split out lending to homebuyers and businesses, but said flows to individuals had been "typically positive", while credit to businesses had "mostly been negative".

However, it added net lending to companies was "less negative" than a year ago, and that it would "take time" for the scheme to feed through to bigger lending volumes.

Paul Fisher, executive director for markets at the BoE, said the net lending fall was "broadly as expected".

He added: "The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013."

Barclays borrowed £6bn from the FLS and increased its lending by £1.1bn during the quarter, while Nationwide Building Society also hiked its lending by £1.2bn after drawing £2.5bn from the scheme.

There were also major credit injections from firms including Tesco Bank, Virgin Money and Coventry Building Society.

John Longworth, director general of the British Chambers of Commerce (BCC) criticised the scheme for failing to boost credit to businesses.

He said: "The real test for Funding for Lending is whether it is able to get credit flowing to young and fast-growing businesses.

"Unfortunately many of these growth firms are still being left out in the cold when it comes to accessing finance, which prevents them from expanding, creating jobs and helping to drive a business-led recovery."