Project Merlin may not wield a magic wand

Are Project Merlin’s lending targets just a myth? On the basis of today’s figures it’s still rather hard to tell. The arrangement between the government and the banks did yield £214.9 billion of gross lending to businesses in 2011 — against a target of £190 billion, and a 20 per cent increase on 2010. But net lending also declined in every quarter of the year. And the target for lending to small businesses of £76 billion was missed by £1.1 billion. 

The banks have put this shortfall down to fewer small businesses coming forward for credit — and there’s actually some truth in that. This survey suggests that small businesses did indeed withdraw their begging bowls as the year progressed. Although, in truth, some of them were put off more because they expected to be refused by the banks than because they didn’t want to borrow.

The government, of course, regards this as a major, ongoing problem. Which is why it’s eager to replace Project Merlin with its new Credit Easing Scheme later this year, to ensure that businesses still have ready access to credit. Their policy is, in effect, to close the gap between the two lines for the UK in this eye-catching chart released last year:

But I do wonder: rather than being a problem to be feared, might that gap be more a natural correction following years of easy credit and over-dependency on debt? It’s a question that few politicians ask, as they bluff and bluster about lending targets. But they should, not least because its answer could determine whether they’re boosting the economy or merely wishing forward another bubble.

That survey I mentioned above contains some useful correctives to the predominant idea that businesses are gagging for credit. Did you know, for instance, that ‘Most SMEs were “happy nonseekers” who had not sought, or felt the need to seek external finance in the previous year’? Or that ‘34 percent of all SMEs can be described as completely disengaged from borrowing (they have not borrowed, have not wanted to borrow and are happy to have no plans to borrow in the immediate future)’? Or indeed that:

‘79 per cent of overdraft applicants and 63 per cent of loan applicants were successful with their loan/overdraft application. 16 per cent of overdraft applicants and 31 per cent of loan applicants ended up with no facility at all. This is the equivalent of 2 per cent of all SMEs being unsuccessful with an overdraft application and 1 per cent of all SMEs being unsuccessful with a loan application.’

Of course, this doesn’t mean that there are no concerns around lending to businesses. A loan can make all the difference between an entrepreneur succeeding or not starting up in the first place. But let’s not assume that today’s £1.1 billion lending shortfall will be a disaster for the economy — nor that the answer is more cheap money. These things are worth questioning at least.