A new report by The Ernst & Young ITEM Club will be greeted with an overwhelming sense of disappointment by thousands of business owners across the UK this week. The report, released on Monday, forecasts that overall bank lending will contract in 2012 for the first time since 2009.

 

According to the Financial Times, "[the report forecasts] overall bank lending will contract 2.2 per cent this year after growing 4.3 per cent in 2011". The contraction in corporate loans is expected to be particularly sharp, with a 5.7% fall forecast for 2012.

 

Neil Blake, senior economic adviser to the Ernst & Young ITEM Club commented: "Funding for small and medium-sized enterprises is likely to be particularly difficult to obtain as banks seek to reduce credit risks."

 

RBS, the state-backed bank, has been quick to defend its lending record, almost pre-empting the report by Ernst & Young. According to a report by the FT, RBS is expected to have lent an estimated £31.5bn to SMEs in 2011, "providing in excess of 40 per cent of the total amount of loans made by the UK's five biggest lenders".

 

Lending to SMEs has become a hot topic recently as economists argue that small businesses are vital to growth and job creation, two things the UK economy desperately needs. However many small businesses have struggled to find funding since the financial crisis of 2007, accusing banks of hoarding cash and making it increasingly difficult to find accessible and affordable loans.

 

If bank lending was to contract in 2012 then more and more SMEs would face financial pressure, which could ultimately lead to an increase in the number of small and medium sized businesses going bust. " As young companies tend to be high-growth businesses, this will have adverse knock-on effects for economic growth" said Neil Blake.

 

Posted by Miles Pritchard