Who Needs it? Doubts Over George Osborne and Mervyn King's 'Funding for Lending' Bank Plan

Doubts are being raised over the efficacy of a new multi-billion Treasury and Bank of England scheme to get banks lending to businesses at cheaper rates, due to an apparent lack of demand for lending from small and medium size enterprises (SME).

Under the "Funding for Lending" plan outlined by Chancellor George Osborne and the Bank of England governor Sir Mervyn King at their annual Mansion House speech, around £80bn in below market rate loans will be made available to banks in order to get them to lend to businesses and consumers at affordable rates.

"I doubt if the mechanism will have more than a marginal impact on most forms of corporate lending," Douglas McWilliams, chief executive of CEBR, said.

Osborne and King believe that what is holding back businesses from borrowing and in-turn investing in expansion and jobs is the lack of access to cheap credit, which the new fund would help bring about by absorbing the lending risks banks are currently unwilling to take.

Access to funds would be "linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty," King said in his speech to City financiers.

"It could, I hope, be in place within a few weeks," he added.

SME credit demand

There are concerns around whether the appetite for credit exists among SMEs with only around half actively seeking finance and with the rest experiencing a good success rate in lending approvals.

"Most SMEs that applied for finance were successful, with overdraft success rates remaining higher than for loans," according to the latest research into SME finance by BDRC Continental, the UK's largest independent research consultancy.

The report shows that 79 percent of applicants for new or renewed overdraft facilities were successful, while 59 percent of loan applications were successful.

Across the year 90 percent of renewal applications for existing credit facilities were approved by lenders, with 59 percent seeing success in applications for new or increased lending.

Furthermore 60 percent of SMEs say they are "happy non-seekers" of new finance for the next three months.

A business confidence index compiled by the Centre for Economics and Business Research (CEBR) and Institute of Chartered Accountants in England and Wales (ICAEW) showed they think there will be capital investment of just 1.4 percent over the next year.

"Survey-based findings within this suggest that expected business investment over the next twelve months will be lower than over the previous twelve months, which does suggest that businesses are not confident enough about the economic situation yet to invest," Rob Harbron, an economist at CEBR, said.

A lack of desire to invest means there will inevitably be diminished demand for credit.

UK house prices may get boost

CEBR's McWilliams said in his note that the boost to lending is more likely to come from commercial and residential mortgages.

"The UK still has a lively commercial property market despite the state of the economy and this additional access to money looks to be highly suitable to provide additional finance for the sector," he said.

"And by making mortgage lending more easily available, it will be possible for lenders to edge up loan to value ratios which could slash the deposits required from first time buyers by as much as a quarter."

This would be good news for first time buyers who must front as much as a 20 percent deposit in order to get a mortgage approval.

Temporary schemes such as First Buy have seen the government offer to underwrite home loans for first time buyers in order for them to get access to funds at a 5 percent deposit requirement.

House prices have also been broadly flat, falling slightly across the year.

A lack of new supply to the housing market has helped to underpin prices as demand remains subdued.

However if the government's "funding for lending" programme does feed into mortgages then this demand may pick up and carry house prices with it.

More QE to come?

This latest effort to get the economy moving comes after the Bank's £325bn quantitative easing programme wrapped up in May.

Called the "asset purchase facility" it saw the Bank buy up billions of pounds of high quality assets, such as gilts, from the UK market in order to improve liquidity.

It was hoped that this liquidity would be used by businesses to invest in expansion and jobs, though it appears that many have hoarded the cash gifted by the central bank.

This is reflected by the UK plunging back into its second recession in four years, as the economy contracted -0.3 percent for two consecutive quarters, at the end of 2011 and the start of the new year.

Many economists believe that there will be more quantitative easing from the Bank in the coming months, as the eurozone crisis, which is seen as a major threat to the UK recovery, rumbles on with no sign of a conclusive rescue package for ailing countries such as Spain and Greece.