£80bn of cheap finance for consumers and small businesses

Posted in 'Credit Crunch' by Barry Stamp

18 June 2012

The announcement at the annual Mansion House speech last Thursday night that the banks are to be lent some £80 billion at low rates, to enable them to lend-on to consumers and to businesses at cheaper rates, is a very welcome and proactive measure.

Although the Government has long been urging the banks to lend more, to re-kindle the economy, the reality is that bank lending has been difficult to obtain, in particular by small businesses, because the banks cannot afford to reduce their credit risk criteria at such a turbulent time. If they did do so, and if bad debts started to increase, then the criticism for that would be much more severe than the current criticism for not lending in the first place, as it is generally believed that bad credit assessment was the principal reason for the current, global credit crisis.

For a long time now, consumers have been deprived of real choice for personal loans in the marketplace, with only a very few lenders ‘actively marketing’ for new business. Yet demand for certain types of loan, such as car loans and store instalment loans, are markedly up, as we reported last week.

It seems clear to us that the banks will need to demonstrate very visibly that they are using the £80bn of cheap funding to extend cheaper loans and other finance to consumers and small businesses. Also, we believe that such cheap finance will be extended and actively marketed primarily to those with good or excellent credit ratings.

The relatively recent introduction of ‘rating for risk’, where riskier borrowers pay more in interest than less risky borrowers, is likely to become much more widely used and also much more extreme than it is now.

Some will shout from the rooftops that this practice is unfair and leads to social exclusion, but the hard fact is that it is irresponsible to lend money to those who have a poor repayment history.

We believe that the need to attain and maintain a strong and clean credit history will never be as vital as it will be over the coming years. By lending to good credit risks, the overall risk profile of the banks will also improve, and that should result in better ratings for the banks themselves, which in turn will drive down the cost of money for everyone.

Barry Stamp is a co-founder of Checkmyfile and is a Chartered Banker and a Fellow of the Institute of Credit Management. He can be contacted at barry.stamp@checkmyfile.com.