Executive Hire News › Archives › January/February 2009 › Forum : Start lending now

Forum : Start lending now

It is obvious that the banks are the real culprits that have brought the global economy to its current parlous state. Although the blame also resides with governments whose embrace of free market ideas appears to have blinded them to the need for stricter banking regulations to protect that free market. The irony is that we are now seeing the Labour government, which over the past eleven years has done its best to eschew socialism, being forced to take our failing banks into partial public ownership.

Most businesses would look upon such rescues as humiliating but it is difficult to find much evidence of the banks being humbled. There are examples like the one related recently by a hirer who was surprised when a long-standing customer, with an impeccable credit record, went into administration. The hirer contacted the owner, who told him that the business had an overdraft facility of up to £500,000; it had used £450,000 and had never defaulted on payments. This did not stop the partially privatised bank from demanding that the overdraft should be reduced to £50,000 in seven days! Not surprisingly this was impossible, so seven days later the bank put the company into administration.

That is anecdotal evidence of the sheer arrogance that continues to permeate our banking system, but let’s now add the weight of JCB to it. In January, on the announcement of a further 684 redundancies, JCB Chief Executive Matthew Taylor said that in November the company had been expecting “a moderate second quarter recovery in 2009” because of the re-capitalisation of the banks, but two months later customers were still unable to access credit.

He continued, “The ongoing reluctance of the banks to provide credit is aggravating an economic downturn which is now becoming much steeper than we could ever have envisaged. This unprecedented situation needs to be addressed with some urgency so that confidence and stability can return; otherwise irreparable damage will be caused to the UK’s manufacturing industry.”

Recent weeks have seen a succession of redundancy announcements from other blue chip UK manufacturers from Jaguar to Burberry, no doubt further eroding our already depleted manufacturing industry that now accounts for only 13% of GDP.

It is a further irony that the banks who have been guilty of so much irresponsible lending now appear to be penalising business customers that have acted responsibly. No doubt the majority of those affected are small and medium-sized companies, many of them in the construction industry. Why are the banks behaving in this fashion? Presumably they are fearful for the future of these companies and the lenders believe they need to reclaim their assets now because their values will fall. Such actions are likely to make for self-fulfilling prophecies.

Our government now appears to be waking up to the problem and has launched a second package of measures to encourage bank lending. Will this second round, which includes making available government insurance against bad debts, be more effective?

Even if it is effective, there remains the problem of escalating government debt and its effect on sterling. Speedy’s latest trading up-date - see City News and Tool Hire Top Ten 2009 - draws attention to the growing dependence of construction on spending on public and regulated sector projects. How long can the government maintain such expenditure as its own finances deteriorate, because of its financing of the banks, and, as the recession gathers apace, the double whammy of falling tax yields and rising benefit costs?

Government and banks alike should be mindful of the damage that is being done daily to the construction industry. Speedy Chief Executive Steve Corcoran describes their attitude as quite “perverse”, pointing out the construction industry is responsible for 9% of GDP and employs one in ten of UK workers.

Have banks forgotten their purpose? Their irresponsible lending in recent years has given way to a denial of their obligations to responsible customers. For the sake of UK business as a whole, and the construction and hire markets in particular, banks must start lending again now.