Rishi Sunak’s autumn budget: boosting FinTech Lenders?
by Mike Carter, head of Platform Lending, Innovate Finance
It was particularly pleasing to see the Chancellor announce an extension to RLS (Recovery Loan Scheme) in the Budget and Spending Review last week. This is the Covid recovery loan guarantee scheme for Small and Medium Enterprises (SMEs) which was introduced in April with initial review date of 31 December 2021, replacing the original Covid loan schemes of CBILS and Bounce Back loans. There are obviously many demands on the UK’s finances right now but here at Innovate Finance together with our SME Lending members we have been consistently making the case for an RLS extension.
Additionally, the Bank surcharge levy has always hit FinTech challenger banks disproportionately, reducing their ability to reinvest profits in growth. Rishi Sunak’s increase in the allowance to £100m profit (up from £25million) is a welcome move that will accelerate investment by the financial services innovators themselves, as well as making them more attractive when seeking external funding.
The Recovery Loan Scheme allows lenders to extend loans to SMEs with the benefit of a partial Government guarantee so that small businesses impacted by Covid can still access finance as they recover from the crisis. Over £1bn has been lent under the scheme since it started, and the Government has extended the scheme for 6 months from 1st January 2022, reducing the guarantee from 80% to 70%, and reducing the maximum available per business from £10m to £2m. This is sensible as the economy is emerging rapidly from Covid and fewer SMEs, reducing the need to provide support for borrowing, but recognising the vital importance of keeping finance available to SMEs to boost their investment and growth post Covid.
Innovate Finance members have been critical to delivering SME finance
Innovate Finance members punched above their weight to deliver the predecessor Covid scheme loans, CBILS, and have been very active in providing RLS loans this year. Innovate Finance estimates that over 30% of CBILS loans were provided to SMEs by Alternative Lenders despite many lenders only being accredited to the scheme several months later than the large banks. Prior to Covid, alternative lenders accounted for over 50% of the SME lending market having made steady gains from the large banks following the Financial Crisis. However, the structure and timing of the core Covid guarantee schemes, CBILS and Bounce Back loans, reversed this market share heavily in favour of the large banks once again which we fear could reduce availability of, and competition for, SME finance going forward.
Innovate Finance members are seeing strong demand returning for SME loans
The importance of the Recovery Loan Scheme is apparent from our members’ research with their customers, as they are seeing increasing demand for loans from SMEs including for RLS loans. According to iwoca’s Q3 SME Expert Index of UK brokers, almost 40% of brokers said they had seen an increase in the demand for the government-backed RLS compared to the second quarter. Funding Circle’s research shows that many of the UK’s SMEs are optimistic about their future, with a third saying they intend to expand over the coming year, which is likely to drive demand for finance.
British Business Bank collaboration
Credit should also go to the British Business Bank (BBB) for carefully designing a programme that can be tweaked over time without the need to introduce a new scheme with new rules. We also welcome BBB’s collaborative approach to communicating with our members on the scheme design. Looking forward we would like to see RLS become a long-term non-crisis guarantee scheme which can be turned up or down by HMT and the BBB according to the prevailing economic outlook and conditions in the SME financing market.
Innovate Finance’s SME Lending policy initiatives
The Recovery Loan Scheme is a core constituent of a number of SME lending initiatives that Innovate Finance continues to work on with members, the focus of which is to increase funding for SMEs and to promote greater competition in the SME lending market. Other core areas include access to funding, competitive capital rules for smaller banks, and reviewing the effectiveness of the Bank Referral Scheme. The Government Covid loan guarantee schemes were highly effective at the moment of critical need, and should be applauded, but the unintended consequence has been a significant reversal of market share in SME lending back to the large banks, undoing several years of competitive gains by alternative lenders since the financial crisis.
On capital requirements we will continue to make the case for raising the threshold for MREL and clarifying some of the transition arrangements; making it easier for the Challenger banks to use the internal ratings-based approach to capital requirements; and to reduce standard risk weightings for SME loans to reflect the underlying risk of the asset class. We also hope some of the extra funding for the British Business Bank will enable it to develop an initiative that helps alternative finance providers access cheaper wholesale funding, enabling them to compete on a level footing with the established banks.
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