Project Merlin – Why did it take so long?

On the 9th February, the banks and the government signed a lending and bonus deal.  Under Project Merlin, banks will lend about £190bn to businesses this year – including £76bn to small firms.  There has been a lot of talk has been as to why it took so long to broker the deal.

To answer that, we have to go back in time to late 2008.

The phrases in the news are “Credit Crunch” and “Toxic Debt”.  The banking system is in serious trouble.  They’ve been taking too much risk, making loans that they should not have made, and now the bad debts are pushing them towards bankruptcy.

The chairman of the treasury committee, John McFall, in its second report on the crisis, said it had been caused largely by the banks’ own reckless behaviour.

“Bankers have made an astonishing mess of the financial system,”

“The culture within parts of British banking has increasingly been one of risk-taking, leading to the meltdown that we have witnessed”

A BBC investigation at the time had this to say about HBOS – the worst but not the only offender:

Following the Halifax merger, salesmanship predominated and executives were incentivised to expand the loan book without, it now seems, the normal checks and balances.  The merged banks risk management and credit checking processes struggled to keep pace with its rapid growth.

One former relationship manager said: “They didn’t have their risk management infrastructure in place at all. They behaved in a very reckless fashion. Nothing was done properly.”

Some of the worst excesses seem to have occurred in the area of impaired and high-risk assets, bad debts and provisioning.

“The bank had an ad hoc approach to this whole area,” said one ex-relationship manager.

For example, Bank of Scotland Corporate, HBOS’s corporate lending arm, had a policy of continuing to lend to companies which other banks would have recognised as insolvent and put into administration.

On some occasions, it is claimed the bank was told by appointed advisers that a corporate customer was technically bankrupt and should have been put into administration with the bad debt taken as a loss on the bank’s bottom line. But the bank still kept the businesses afloat.

Now let us roll the clock forward – two key changes have taken place.

  1. The banks have changed their attitude to risk.  They take a more prudent approach to lending and are less reckless in their behaviour.  I cannot find a single blog or news report that says that this is a move in the wrong direction.
  2. The economy has slowed, raw material prices have increased, and consumer spending is down.  The risks to businesses, and the likelihood of company failures, have increased.

Either one of these changes would mean that a business venture that had an element of risk may not get a loan that, in the bad old days, it might otherwise have secured.  Together they multiply and mean that bank lending has to decrease in order to satisfy the government and society’s desire for less reckless lending.  Yet it seems that every week there is another report criticising the banks for not lending enough.

So, the banks have spent the last few years getting a double whammy of being continuously told to both reduce their lending (they’ve taken too much risk in the past) and increase their lending (businesses need to borrow to get out of recession).

Even the Federation of Small Business is in on the game:

To help small firms, the FSB is calling on the government to carry out a number of measures, including forcing the banks in which it had to bail out (RBS and Lloyds) to return to 2007 lending levels.

It is this contradiction, this illogical paradox, this strange idea that you can force someone to lend you money, that has caused the delay to Merlin.

Is it rational to sign an agreement that forces you to increase lending when every instruction and indicator says that you’ve no option but to do the opposite?

Now, here is the bit that everyone forgets:  Banks love lending money.  There is nothing that they would rather do than lend money.  It is their core activity and the way that they make a profit.  I’ve met more than my fair share of and bank personnel and every single one of them wanted to support the business using whatever they could:  Loans, overdrafts, invoice factoring etc.  They will happily talk about any and every method of lending money – but they need to take account of the risks.

However, I am sure that anyone reading this could use google to find a sob story of a small business that got turned down for finance.  Well, I can assure you that the bank would have loved to have made that loan – if the business model was sound, the plan stacked up and the cash flow positive.  If you cannot – or will not – produce this then the bank will correctly view you as a risk they cannot take.

If you come up with a sound proposition, pitch it with passion and authority, you will get the funding.  The attitude of the FSB is misdirected.  The answer is not to play the victim to the nasty banks but to educate and coach businesses into producing decent business proposals.

Instead of talking of forcing banks to increase lending the FSB should be talking of forcing businesses to come up with better business plans.

You could try sitting there in your jeans and telling the bank that the business is near bankruptcy, has run out of funds, and then ask the bank to increase its line of credit.  Your chances of success are very remote but, if you can pitch a convincing business plan in a professional and authoritative manner, it can be done.

I know because I’ve done it.

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About Adrian Fowles

Business advisor, finance mentor and cash coach - Turning your pipe dream into a revenue stream - http://acf-associates.com/
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