More flak for the banks from business customers - what have they done with bail-out cash?

In File on 4 this week, there is more criticism of the banks. The programme investigates the ‘lending squeeze’, meaning that banks who have received huge amounts of bail-out cash from the government are not handing it on as loans to help small businesses. This was intended to be a condition of the help that the government extended to the banks, in order to help keep the wheels of the economy moving. Small businesses often need cash to help them through periods when they forecast negative cash flow – there is a clear pattern that businesses are finding it ever tougher to borrow, even if they are well established and have a good record and working relationship with their bank.

The examples given in the programme include overdrafts granted and then withdrawn, sharply increasing interest rates of up to 8%, and changing the way in which banks value stock from 30% of its sale value to zero. It isn’t only small businesses affected; Logica restructured its debt last year and had gone from paying 1% on top of the Bank of England base rate, to 3%. The attitude of the banks has changed fundamentally; a year ago they were desperately trying to offer credit to businesses, but now they are refusing them overdrafts and credit even if the business owners are prepared to provide personal assets as surety. The result is consistent; small businesses are forced to cut staff and cancel contracts for services like cleaning, in order to manage their cash flow, and the knock-on effects on the wider business community and employment are inevitably bad.

A spokesman from the British Bankers Association is interviewed during the programme and suggests that, if business customers are not happy with the treatment they receive from their bank and feel that the promise the banks gave to the government when they received bail out cash is not being fulfilled, they can complain to the Banking Ombudsman – but doesn’t feel that he can comment on how long such a complaint is likely to take to be dealt with. My guess is that, by the time a complaint had been considered and investigated, even if the ombudsman found in the customers’ favour, it would be far too late to save the business.

You can download the programme as a podcast from the File on 4 website link here.

Questions to consider:
What impact will the reduction in valuation of stock have on a business’s balance sheet and which ratios will be affected?

To what extent is it reasonable that the banks, who have been heavily criticised for too much lending in the past, are now so much more cautious and tight with their credit conditions?