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SME lending soars, says BoE, even as UK doubles down with new borrowing scheme

Bank of England research shows soaring lending to small and medium-sized enterprises during the pandemic, even as the U.K. government opens the taps on further lending, and rising indebtedness could become an issue.

The figures show sharp increases in bank lending to SMEs across the board between December 2019 and December 2020, with loans to firms in the transport and communications sectors up by 58%, for instance, and loans to the badly hit hospitality sector up more than 40%.

British Business Bank PLC said 45% of SMEs applied for external funding support in 2020 compared with 13% in 2019. UK Finance, which represents banks, told S&P Global Market Intelligence that 12% of SMEs were actively planning to apply for finance, while a further 23% expected to be seeking external finance in the future.

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Additional drawdowns

The latest BoE figures available, for January, show that SMEs drew down an extra £500 million in loans and the annual growth rate continued to rise, reaching 25.8%. However, interest rates on new loans to SMEs fell to 2.09% in January — well below the rate of 3.37% in January 2020.

British Business Bank figures show 89% of businesses seeking finance did so because of COVID-19, and 75% of those did so to help with cashflow.

Though banks are protected from losses because of the state guarantee on the loans, those schemes must end at some point, said John Wright, an analyst at S&P Global Ratings.

"Rising indebtedness in SMEs overall could become a broader issue particularly if the government guaranteed lending schemes were to end abruptly, and the post-pandemic recovery proves weaker than expected," he said in an email.

At the start of the pandemic in March 2020, the BoE slashed interest rates and launched a term-funding scheme that offered cheap funding for banks which increased lending to SMEs.

During the pandemic banks have loaned about £45 billion to smaller firms through the 100% state-guaranteed Bounce Back Loan, or BBL, scheme, which allows companies to borrow up to £50,000.

The bigger banks have supplied the majority of BBLs. Lloyds Banking Group PLC, for example, had loaned £8.4 billion in BBLs at the end of the third quarter of 2020, but that has now increased to more than £9 billion to more than 300,000 firms.

NatWest Group PLC, meanwhile, reported it had loaned £7.9 billion in BBLs at the end of the third quarter but as of the beginning of February had approved 291,000 applications totaling £8.92 billion. Barclays PLC, which had approved £9.2 billion BBLs at the third quarter, has now approved £10.36 billion to more than 330,000 customers. HSBC Holdings PLC had provided £6.3 billion at the third quarter of 2020.

Smaller, challenger banks, like Metro Bank PLC, focused on lending to smaller firms.

"We've extended £1.5 billion to 36,000 businesses via the government's lending schemes, whilst offering support with payment deferrals, covenant waivers and interest roll-ups," said spokesman George Young via email. The bank's SME deposits grew to £4.4 billion in 2020, up 36% from £3.3 billion in 2019.

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However, the Office of Budget Responsibility has said that up to 40% of BBLs borrowers may default, which could lead to losses of up to £33.7 billion. The government has given borrowers an extra six months from May for when they have to start repayments.

U.K. Chancellor Rishi Sunak on March 3 announced a further borrowing scheme, the Recovery Loan Scheme, allowing firms to apply for loans from £25,000 up to £10 million, with a state guarantee to banks of 80%.

Lending during pandemic

The BoE figures show that SME lending jumped as the pandemic took hold in the U.K. After the country went into its first national lockdown in March, SME lending increased from its regular level of about £170 billion to more than £188 billion in May, and remained above £210 billion in October, November and December.

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The Federation of Small Businesses said that the proportion of small firms carrying some form of debt had risen to 69% from 56%, with the share describing their debt as "unmanageable" up to 40% from 13% during the pandemic.

"A small but meaningful minority of small firms have continued to trade as normal over the past year — particularly those that had a well-established online presence before the pandemic hit or developed one soon after it took hold," FSB National Vice Chair Martin McTague said via email.

"These businesses may still have taken out loans, but haven't necessarily had to deploy funds as a matter of urgency. For many, though — and especially those operating in areas like events, travel, the creative industries and our night-time economies, where human interaction is fundamental, and government support has been found wanting — debt is proving to be unmanageable."

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McTague said the government's newly announced "super-deduction" tax incentive scheme to encourage investment should be open to smaller firms. He also said most debt-laden small firms needed a contingent tax liability approach whereby COVID-19 loans were only repaid when profits were made.

Ahead of the pandemic, many SME sectors including information technology, financials, industrials and healthcare suffered a decline in return on capital between 2017 and 2019, according to data from S&P Global Market Intelligence.

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SMEs were generally in a stronger position with regards to debt. Debt as a percentage of equity had come down for businesses in virtually all sectors in the three years since 2017, with the exception of real estate where it rose sharply in 2019.

When the pandemic hit, lending across the board to SMEs rose sharply, unsurprisingly. The real estate sector was by far the biggest recipient of loans at £79 billion, with wholesale and retail running a distant second with loans of £22 billion, just ahead of construction at £21 billion. Public administration and defense, described by the Bank of England as firms that provide education and cultural services among other things, saw the biggest percentage increase in lending, though from a low base.

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