Business lending predicted to rise

Looser money markets and falling bad debts are set to drive the first pick-up in bank lending to businesses for four years, an influential forecasting body predicted today.

The Ernst & Young (E&Y) Item Club predicts lending to companies in the UK will rise 3% - or £13 billion - this year to £440 billion, after shrinking 5% in 2012 to £427 billion.

It expects business lending to surge by 8.5% to £477 billion in 2014.

It also expects the Government's recently-revamped Funding for Lending Scheme (FLS) to encourage lending to small companies and restore confidence - helping drive the better-than-expected business lending.

The Bank of England and the Treasury last week overhauled the FLS amid signs the flagship policy is losing its bite and failing to boost credit for small firms.

The scheme - which incentivises banks and building societies to lend more to households and businesses - will be opened up to non-bank lenders such as invoice finance houses and leasing firms.

Lenders will also be given access to more cheap funding in return for extending loans to smaller firms.

Andy Baldwin, head of financial services in Europe at E&Y, said: "Behind the scenes, banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy.

"Our analysis suggests the main drivers of banks' return to lending will be better access to wholesale funding and a decrease in non-performing loans, rather than the Funding for Lending Scheme making a material difference.

"That said, the scheme is making a contribution in shifting emphasis and encouraging lending expansion across the sector while also helping to restore confidence and stimulate demand from consumers and SMEs (small and medium businesses) alike."

The Item Club expects improving credit conditions and economic growth to cut bad debt write-downs to £9.3 billion or 0.56% of total loans this year, from £11.6 billion in 2012.

It also predicts the Government's multi-billion pound Help to Buy package of loans and guarantees will boost the housing market, with transactions rising by 7.4% in 2013 and 7.8% in 2014.