YUSUFF ALI Thursday, July 19 2012

I cannot tell you whether the idea is original. I can only say that this is the first time I have heard of such a thing. The Bank of England and the Treasury have launched a flagship scheme to encourage banks and building societies to increase their lending.

Under the scheme, described as “funding for lending”, households and businesses have been thrown a lifeline worth billions of pounds, in a desperate effort by government to breathe life into the economy and drag Britain out of recession. Banks and building societies will be given access to low-cost funds on condition that they boost lending.

The policy, first announced last month by bank governor Sir Mervyn King, is meant to prevent the choking off of the supply of credit to the economy, as these institutions see their own borrowing costs rise because of the debt crisis in the eurozone.

They will initially be able to borrow up to five percent of the value of their lending. If all eligible banks and building societies take part and draw down the maximum amount, the new money being made available would amount to as much as £80 billion.

According to my understanding of how the scheme will work, banks and building societies will be offered funding at low interest rates over a four-year period but it will be directly linked to their lending performance to encourage them to increase the availability of loans and reduce their lending rates.

For every pound of additional lending they make, they will be able to access an extra pound of cheap funding from the scheme. Their borrowing rates will start at around 0.75 percent, far cheaper than the 1.25 percent to 2.5 percent they now pay.

The bank will publish an institution-by-institution breakdown of lending each quarter, a kind of naming and shaming league table that will reveal how much they are lending. It hopes that first-time house buyers and small businesses will benefit the most, as they have been starved of affordable credit since 2008.

As with anything new, there will always be critics. Some experts have warned that there are no guarantees the scheme will address the core problem of companies reluctant to borrow or that it will see banks lending more, even with the carrot of cheaper funding.

But the bank hopes that competitive pressure will ease rates and borrowing terms substantially. It believes that easier access to cheaper borrowing should boost spending, by allowing families, for example, to purchase homes, or by allowing firms to finance investment in new and productive enterprises.

Higher spending should create jobs and raise incomes, which in turn would encourage firms to borrow for expansion and development. The bank made it clear when launching the scheme that it was designed to support the economy and not the banking industry.

The British Bankers’ Association has thrown its support behind the scheme. An association spokesman said, “We welcome this initiative which clearly shows that the government and the Bank of England are ready to stand with the financial sector in ensuring the money is available to fuel the recovery.”

John Cridland, director-general of the Confederation of British Industry, said, “This new scheme should provide a real incentive for banks and building societies to increase their lending to businesses and individuals at lower rates of interest.”

The Council of mortgage lenders also welcomed the scheme. Its director-general, Paul Smee, commented, “While it is difficult to say exactly what its impact on the mortgage market may be, the scheme seems likely to encourage lending…and should be a helpful support to economic growth.”

As I said at the beginning, I have never heard of such a scheme before. But, from what I can gather, the Treasury and the Bank of England seem to be on to something. Perhaps, the newly-appointed governor of the Central Bank, Jwala Rambarran, could look at this scheme to see if there is anything in it that could be adapted to help TT’s economic recovery.