We’re all used by now, to hearing how hard it can be for small business to get money from the banks. We’re also pretty used to hearing about the government’s efforts to get new lending going, and will hear more of it later this week or early next when the Treasury plans to reveal its latest scheme to encourage the banks to make new loans. We are also used to hearing the banks say they are trying as hard as they possibly can to lend. Stephen Hester from RBS repeated that message again this afternoon.
What we’re less used to hearing about from politicians is what I have been hearing anecdotally across the country more and more. It’s not just that firms are finding it tough to get new loans or overdrafts. And we’ve discussed here before how some of the banks are renegotiating loans and then counting them as ‘new lending’ towards the targets the government set, even though the loan or overdraft is the same. What is also a problem is how some companies say their banks are dealing with their existing lending, making lending more expensive and according to one expert, breaching their contracts.
Like in most walks of life, a deal is meant to be a deal. But some companies are finding their banks increasingly unwilling to stick to the terms of the deals they struck over their lending. One Scottish businessman, Calum McLachlainn has been in business for more than twenty years, and with several different companies, has accounts with several different banks. It’s no surprise that he says previously the banks made it clear they were not interested in lending any new money, but that something changed about six months ago and the situation got dramatically worse. No longer are banks just reluctant to lend more he says, but ‘they started saying we want to revisit your existing loans’. If there has been no change in circumstances, this is not meant to happen.
He told me one of his banks has asked him to ‘volunteer’ to accept an interest rate increase of 5 percent on one of his loans, a year and a half before the contract on the loan is up. If he does not accept that increase he says he’s been threatened with a whopping rise of 11 percent – either could add tens of thousands of pounds to the cost of one of his firms. He says ‘there is nothing we can do because I bank with 3 banks and they’re all saying the same thing….they’re not in the business of lending and we can cope with that, but when it comes to not honouring existing contracts, it really becomes difficult….if all the banks are doing this, we are finished’.
As things stand, his companies employ about 600 people. Right now, he says if it goes on, ‘we we would have to close companies and that would be the end of me being in business’. Of course if customers break their side of the deal with a bank then they are entitled to change or terminate any lending agreement. But for Calum, he says he has been told he is a good customer. One of the documents he showed me is testament to this, saying, ‘the existing loan has run in an entirely satisfactory manner…the decision is NOT based on the conduct of your account, but simply the fact that at this point, we do not have any appetite for further lending in this subsector.” He says he’s had good relationships with many of his own actual bank managers, some of whom are deeply unhappy at what they are having to do to hit central targets because it is ‘tantamount to being dishonest’.
Nick Singer, a leading Glasgow accountant, believes how the banks are behaving is potentially illegal under the civil law. He says he has been ‘inundated’ with appeals from customers who are having these kinds of problems. He says ‘banks are making a concerted effort…scrubbing agreements with clients…by threatening that there won’t be support for their business if they don’t agree to new terms.’ Singer asserts that if banks are forcing clients into accepting more expensive terms, ‘it is illegal acts…you can’t operate like this.’ Trying to rewrite existing lending agreements when the client has stuck to the letter of the deal he says is in direct contradiction of the codes banks are signed up to.
Banks, he says, are scouring accounts for any evidence of breaches of contract that would give them an excuse to change terms. But even if there is nothing they are prepared to stretch the truth he says – ‘in most of the agreements I’ve been reading with lawyers, the breaches are fabricated.” With the very well documented problems for companies getting new finance some of his clients are so terrified that they no other bank would take them on that they accept new much more expensive terms. In other cases, even if the banks do not persuade their clients to accept new terms, they are sometimes imposing new ‘management charges’. One of Singer’s clients for example, has accepted new ‘management charges’ of two thousand pounds every single month, even though there has been absolutely no change in the service he either requires or receives. But the client simply felt he had no choice because he feared no other bank would take him on in this climate. For many, no credit, means no business.
Another businessman, in property in a different part of the country writes to tell me that again in the last couple of years his bank had made plain that they did not want to expand their lending at all. But that his business lending recently took a ’sinister turn’. Without informing him, his bank devalued his property portfolio by 50%. He says his manager has now ‘made it plan they are prepared to adopt a non-negotiable strategy” to force him to sell off chunks of the business if he can’t find financial support from any other banks. Again, he says there is nothing in the deal that he signed with the banks that has changed. He believes that his bank is not just making life difficult. They have essentially ‘dumped him’ he says, and he has been told that bank staff are being paid bonuses based on the amounts of cash they get back out of property and back into the banks’ coffers.
Let’s be clear, at the moment the government, is asking a lot of the banks. It may not be a popular thing to say, but it is absolutely true that it is not an easy time for the banks. Despite the public outrage at levels of bonus payments there is no point pretending the banking industry is somehow having fun at the expense of the rest of the country. We are asking them to get out of riskier lending, and many of them are trying to get out of particular sectors like property, especially in some parts of the country. And we are also asking them to build up their balance sheets, and hold more funds in reserve. The idea is if they have more cash in case of emergencies, if things go wrong they’ll be able to withstand the shock and the rest of us wouldn’t have to bail them out. But for an industry that for many years was in some regard acting as a salesman for cheap credit, rather than a sensible steward of enormous amounts of cash this is a very difficult transition to make.
But we are also as a country asking them to pursue a goal that pulls in the opposite direction, to get more money out of the door in lending to small businesses, which is often regarded as the riskiest bet. And the underlying tensions in the eurozone means it is costing them more to operate in the first place.
There are many bankers who genuinely want to re-build trust and help re-build the economy. Indeed there are those at the very top of some banks who believe passionately that they do have a duty to lend more, to lend safely, and to persuade businesses that it is worth taking the risk to apply for finance. They are having to deal with the problem of lack of demand. Many firms are so nervous about spending because of the economic climate that they are simply not approaching banks for credit. RBS is fond of quoting the revealing statistic that actual take up of available overdrafts is at a historical low.
But making life almost impossible for some of their existing customers if they have done nothing wrong is surely not the way to change this situation. Watch our reports on ITV News today at 6.30 and 10.
The British Banking Association told me that “When a loan or other borrowing facility is agreed, the bank will provide the customer with a letter setting out the full details, including interest, charges and the period for which the facility has been agreed. The letter will also cover whether security is required and any specific conditions that may have been agreed, such as the provision of management accounts or minimum security values that must be maintained. Details of the sort of circumstances that will lead to an earlier review or require payment will be provided, together with action that the bank might take if repayments are not made. It’s important that customers read and fully understand the agreement and where appropriate seek independent advice before signing it.”
