UK banks reluctant to lend to small firms - govt report

By David Milliken

LONDON, April 12 (Reuters) - Britain's banks are lesswilling than before the financial crisis to take the risk oflending to small businesses, a government-commissioned researchreport said on Friday.

Small business lending is a sensitive political topic inBritain. The Bank of England and politicians say a lack of banklending is part of the reason for the country's very slowrecovery from the financial crisis.

Banks say that weak lending growth is largely due to firms'unwillingness to invest in an uncertain economic climate, not areluctance to lend on their part.

However, a new report from the National Institute ofEconomic and Social Research, Britain's leading macro-economicthink tank, seems to contradict this.

"We control for firm risk and other relevant characteristicsin our analysis and still find rejection rates for bank loansare generally higher in 2011-12 than 2008-9," said NIESR.

The report was commissioned by Britain's department forbusiness, innovation and skills, whose minister, LiberalDemocrat Vince Cable, has been a regular critic of banks and hasurged the Bank of England to do more to boost business lending.

In the middle of last year the government and the centralbank set up the Funding for Lending Scheme, which offers bankscheap finance if they maintain or increase lending to householdsand businesses.

Much of the benefit so far appears to be going tohome-buyers rather than small businesses, and although thescheme is in its early days, Cable has asked the central bank tolook at ways to change this.

Earlier this week the Bank of England official in charge,Paul Fisher, appeared to agree with NIESR on bank lending,telling a Scottish newspaper that major banks' creditassessments may still be "too severe".

NIESR said low-risk small businesses seemed to have bornethe brunt of banks' "credit rationing", which took place throughhigher overdraft interest rates and outright rejection of loans.

However, there was also evidence that banks' reluctance tolend reflected an attempt to reverse poor lending decisions madein the run-up to the 2007/08 financial crisis, NIESR added.

NIESR published only summary findings of its research onFriday. The full report will be released at 1100 GMT on Mondayat