UK loans drop despite flagship credit program

British banks participating in a plan to boost credit to businesses offered fewer loans in the first quarter of the year, raising some doubts over the program's ability to help revive the weak economy.

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Data released Monday by the Bank of England shows that net lending by banks and building societies participating in the Funding for Lending program dropped by 300 million pounds (USD 455 million) in the first three months of 2013 compared with the previous quarter.

Funding for Lending offers cheap loans to banks so that more credit can be made available to small and medium-sized businesses and other parts of the economy. The hope is particularly for small businesses, which can then use the money to hire and invest — thereby giving the wider economy a boost.

The Bank of England said the figures may reflect a desire by lenders to reduce the scale of their balance sheets or to shed operations as a condition of receiving state aid. Some lenders want to shrink their "non-core" portfolios, such as commercial property loans.

The Bank of England started the program late last year together with the government, having already eased its monetary policy aggressively.

It has cut its key interest rate to a record low of 0.5 percent and injected 375 billion pounds (USD 579 billion) into Britain's economy in a program known as quantitative easing. Under the program, the bank buys government bonds from financial institutions, with the goal of lending to businesses and individuals and pumping money into the economy.

But Britain's economy has flatlined in recent years — it grew an anemic 0.3 percent in the first quarter.

The International Monetary Fund has called on Britain to do more to support the economy, though it acknowledged that the impact of such easy monetary policy is being hindered by the fact that the banks are still cautious about lending.

Business Secretary Vince Cable acknowledged in a BBC interview that the impact of the program remained modest.

"The small business lending is the key to recovery and we are not seeing much action on that side," Cable said.

The report will be unpleasant reading to policymakers in the 17-country eurozone who have been hoping to draw up a similar program to boosting lending. The European Central Bank is currently reviewing ways to increase lending to small- and medium-sized companies.

Critics and union leaders in Britain argued Funding for Lending wasn't necessarily the best way to use the money.

"The Funding for Lending scheme is not providing the support small businesses need in these tough economic times,"said Frances O'Grady, the general secretary of the union federation, the TUC. "It seems that some banks are just using the Funding for Lending to improve their capital position."

The 40 participating lenders have drawn 16.5 billion pounds from the plan.

Lloyds, which is partly owned by the British taxpayer, loaned one billion pounds less during the quarter — though it borrowed three billion pounds from the plan. Lloyds said these figures didn`t tell the whole story, arguing that it had increased lending to small- and medium-sized business by four percent a year on a net basis.

It also said the overall decline in net lending, including non-core, was less than the previous quarter.

Royal Bank of Scotland, which is majority owned by the British taxpayer after it was rescued by the government in 2008, cut back its net lending by 1.6 billion in the quarter, but has borrowed 750 million pounds.