Phil Orford: A comeback call for the local bank manager

One the one hand, they have been under pressure to tighten up credit conditions and rebuild their balance sheets in order to avoid further bailouts.

On the other, they have been urged to increase lending to smaller businesses in order to stimulate the economy and, in a manner of speaking, repay their debts to society.

As the head of a support organisation for smaller businesses, part of my role is to hold the banks to account.

However, I can appreciate the difficult position this paradox puts them in and it’s perhaps not surprising that lending to small businesses has been in such short supply since the recession.

Through the feedback I receive from our members, I know that countless viable, well-run and prosperous small and medium-sized companies have been denied finance, despite solid order books and lucrative future contracts.

And, sadly, lots of firms have gone under for want of a relatively small sum of short-term credit – for example, an overdraft extension to see them through a temporary cash-flow shortage while waiting for money owed to them to be paid.

The issue hit the headlines once again this month when initial figures showed that the banks are on course to miss their lending targets set out under the ‘Project Merlin’ agreement.

As part of their commitment to lending £190bn to businesses in 2011 – including £76bn to small and medium-sized enterprises (SMEs) – the UK’s main banks have pledged to lend £19bn in the first three months of the year.

However, by the banks’ own admission, they provided just £16.8bn of finance in the first quarter.

According to a joint statement issued by those involved in Project Merlin, the demand for lending among small businesses has declined.

While the Forum’s own research suggests many firms are, indeed, focusing on consolidation rather than growth at present, we believe that this is a consequence of restricted lending conditions, rather than a cause of it. Over the past three years, business owners have become increasingly alienated from the banks because of lenders’ punitive risk criteria and inflated interest rates.

However, there is a solution, and it is one which we at the Forum have been proposing for almost three years.

Banks need to abandon their automated, centralised, ‘tick-box’ procedures for credit applications, in which the bank representatives have little or no knowledge of their customers and the sectors in which they operate.

Instead, we urgently need to see a return to the system we used to have – case-by-case, bespoke lending decisions made by experienced and empowered local bank managers; managers who know their customers and can make more informed, accurate lending decisions.

Some may argue that the days of Captain Mainwaring-style bank managers sitting down for a cup of tea with their customers, are long gone in today’s cut-throat business world.

True – it is obviously cheaper for the banks to centralise and automate the lending process based on pre-determined criteria, using relatively junior, inexpensive staff to act merely as a point of contact or salespeople for their products.

Hiring qualified, experienced people on the ground, who actually spend time getting to know their customers’ businesses and can be trusted to make important decisions, costs good money.

However, this process still happens at some lesser-known banks and they don’t seem to have any problems maintaining profitability.

One example is Stafford Railway Building Society in the Midlands – a small, long-established bank which lends only to local customers and requires all lending decisions to be reviewed personally by one of two experienced senior managers.

Meanwhile, Swedish bank Handelsbanken also appears to be doing very well for itself through its stated its aim of exploiting the gap in the market for personalised small business lending, and has helped several Forum members finance their specific projects and expansions.

This is why the Forum has been calling for the re-empowerment and re-localisation of bank managers in order to ensure that the businesses which receive funding are the ones which deserve it the most.

Achieving this isn’t just in the interests of business owners – a more stable, prosperous and profitable small business sector benefits everyone in society.

If you agree with us, please visit www.getbritaintrading.co.uk and pledge your support for our Get Britain Trading campaign, which also calls for a range of other sweeping yet realistic measures to help small firms across the UK.

Phil Orford is chief executive of The Forum of Private Business.