Responding to pressure to stimulate
business lending, the UK government introduced the National Loan
Guarantee Scheme in its March Budget. Grant Collinson discovers the
scheme, which includes leasing in its lending remit, has not been
wholly endorsed by the asset finance industry
The inclusion
of leasing in the National Loan Guarantee Scheme (NLGS) was
welcomed by the Finance & Leasing Association (FLA) when
Chancellor George Osborne announced the plan the day before his
2012 Budget back in March.
Go deeper with GlobalData
The move was the result of months of hard
lobbying on the part of the FLA and the body’s director general
Stephen Sklaroff described the result as “very good news” for
businesses.
A couple of months later, however, one UK
lessor has described the scheme as “anti-competitive”,
“fundamentally flawed” and “a gimmick” and he claims not to be
alone in such a verdict.
Under the NLGS the government will guarantee
£20bn of bank funding to lend to SMEs, defined as having a turnover
below £50m, at a lower cost.
Participating banks, which at the time of
writing include the Royal Bank of Scotland Group, Lloyds Banking
Group, Santander and Barclays, with Aldermore Bank agreeing to join
in principle, can apply for government guarantees which allow them
to raise funds at a lower cost on the condition they can
demonstrate the cost saving, up to one percentage point, will be
passed on to businesses.
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By GlobalDataOne of the issues Peter Collins, chief
executive of MAN Finance, the UK captive finance arm of the German
commercial vehicle manufacturer, has with the scheme is the
limitations on which companies are able to participate.
Speaking exclusively to Leasing Life,
Collins said: “Captives are not involved. It seems
anti-competitive. It just doesn’t seem right that the government
can give support by giving cheap loans to banks and not to other
asset finance providers.”
Collins said he was not alone in feeling the
NLGS is not fairly balanced and said other manufacturer-based
funders have the same grievance.
“NLGS doesn’t help us write more business and
it doesn’t help our customers either. It just means banks get more
[business],” he said.
Julian Rose, the FLA’s head of asset finance,
defended the scheme and said writing more business is not what the
NLGS
is about and said it should be looked at in context.
“The government’s objective for the NLGS is to
reduce the cost of credit to small businesses rather than to
increase the supply of credit,” said Rose.
“I think it is important to see the NLGS as
part of the wider credit easing programme of the government and at
the moment the credit easing programme comprises three elements –
the NLGS, the Business Finance Partnership and there is a planned
third element to come,” he added.
Longer-term schemes
Through the Business Finance Partnership (BFP),
the government will make available an initial £1bn for investment
through non-bank lending channels and “aims both to increase the
supply of capital through such channels and, in the longer term, to
help to diversify the sources of finance available to businesses”,
according to the Treasury.
The BFP will focus on co-investment through
managed funds with private sector investors, although the Treasury
is considering other non-bank lending channels, though asset
finance is not specifically named.
In contrast to the NLGS, the BFP is a measure
designed to increase the supply of credit rather than necessarily
reduce the cost, said Rose and added the FLA is working to make
sure asset finance is represented in the BFP and other elements of
the government’s credit programme.
“By the time all three elements are in place we
hope that all parts of the asset finance market are able to
participate.
“We don’t yet know what all the pieces are
going to look like and we are making the point very strongly to the
government that when the programme is complete it needs to both
promote increased credit and lower- cost credit and do so through
all parts of the asset finance market,” he said
The Treasury defended the NLGS against Collins’
anti-competitive accusation by highlighting the BFP and pointing
out the NLGS was aimed specifically at tackling a bank problem.
A Treasury spokesperson said: “Asset finance is
one of the ways that NLGS loans can be given, but the purpose of
the scheme is to lower the cost of bank lending to small
businesses. The government is also taking forward initiatives to
encourage alternative lending channels for businesses, such as the
BFP.
“The NLGS was launched during a time of
stressed market conditions where to raise wholesale funding,
because of the uncertainty in the current economic climate, was
costing banks more, therefore pushing up the cost to businesses.
The NLGS is about tackling that issue, allowing banks to raise
funding more cheaply and therefore pass on those cheaper rates to
businesses.”
One of the bank-owned lessors benefiting from
cheaper fundraising offered by the NLGS is Lombard.
The asset finance division of RBS has completed
several deals through NLGS, with roughly eight out of every 10
businesses seeking finance from Lombard eligible for the
scheme.
Leasing
Life spoke to Ian Isaac, managing director of Lombard Business
& Commercial, and Alex Massouh, strategy and product manager,
to get their views on some of the criticism levelled at the
NLGS.
Responding to the anti-competitive allegation,
Isaac pointed out there are several bank-owned lessors still
competing for business that is eligible for NLGS.
He said: “The fact that you have this available
to at least four or five bank-owned businesses to deploy
it how they choose satisfies me we are working on
a level playing field in the bank-owned market
and there are other options available, or shortly
to become available, to the non-bank sector in
due course.”
Isaac’s colleague Massouh gave partial
concession to Collins’ point about captives missing out.
He said, when viewing the leasing indus
try in isolation, the NLGS could seem anti-competitive but
suggested having bank-owned lessors benefit from the scheme is a
better situation for the asset finance industry than if only term
lending had been eligible, in which case potential Lombard asset
finance customers might have chosen other lending products.
Collins criticised the NLGS further, however,
as not being the right scheme for asset finance because it doesn’t
encourage SMEs to invest in business assets any more than they
otherwise would have.
“The fundamental flaw with the scheme is that
it doesn’t encourage customers to invest in the assets; they have
already made their buying decision – getting their funding for 1%
less is irrelevant” said Collins.
The problem, Collins explained, is that when
SME owners need to invest in an asset they make the decision to do
so before looking to a funder. Only once the decision has been
reached and they are considering asset finance will the NLGS
discount come into play.
“The customer has already made the decision to
buy the asset and then he talks to different funders,” he said.
“The scheme itself is flawed in the way it’s targeting the
market.”
Collins added the government would be better
off trying to encourage the banks to open up overdraft facilities
and give business customers working capital and labelled the scheme
a “gimmick”.
Stimulating investment
Isaac was much more positive about the benefits
of the scheme but he did agree the NLGS does not encourage asset
investment, at least not so far.
“While asset finance providers might like to be
early in the investment decision cycle, we are often engaged
further down the line after the investment decision has been made,”
he said, “in which case, the NLGS cannot be de facto stimulating
investment which wouldn’t have otherwise taken place.”
However, Isaac added: “I do think, given a
little bit more time and opportunity, not just for us but banks
more generally, to begin to market [the scheme] more effectively
then it might encourage more businesses to think ‘now might be a
good time to invest so I’ll dust off my historic investment plans
I’ve shelved for the last three years’.”
Echoing a pointing made by Collins, who said
the level of saving made possible by the scheme was insignificant,
Isaac added: “Looking at the bigger picture, 1% in itself is not of
a quantum to fundamentally make investment decisions that weren’t
viable suddenly viable. I think we need to be realistic about the
[NLGS’s] effect.”
When asked by Leasing Life about
whether the discount available through the NLGS was significant to
SMEs, a spokesperson for the Treasury said the entire benefit
received from lower-cost government borrowing is passed on by banks
to smaller businesses which results in money which can be
reinvested in the future.
The possibility for SMEs to reinvest the saving
offered by NLGS is a point which Lombard’s Massouh is keen to
emphasise.
Lombard, like fellow bank-owned lessor Barclays
Asset Finance, offers the 1% discount in the form of immediate
cashback which Massouh said makes the benefit clear to the
customer.
“When the NLGS was initially announced by the
government it was as cheaper credit – a 1% reduction in the
ordinary business rate that would be charged,” he said.
However, the Treasury was happy for the
discount to be transferred to the customer by any means so long as
there was a robust monitoring framework, Massouh said.
“Putting ourselves in the shoes of the
customers, there is real tangible benefit in getting that cash up
front,” said Massouh. “It is not just the particular deal going
through the NLGS which benefits, but the customer can apply the
cashback in any way they sees fit so it gives them options.”
For Isaac, the cashback discount gives his
sales team an extra tool to help push through a deal and it is
gathering some interest, he said.
“It is an additional conversation piece;
something to pick up the phone to customers and prospects and talk
to them about.”
From a leasing industry perspective, the
greatest appeal of the NLGS for both Massouh and Isaac is the fact
leasing is included at all and the exposure it will bring.
It is a point of view shared by the FLA’s
Julian Rose who said: “The fact that the government is not only
recognising the importance of asset finance, but actually featuring
it very prominently in its schemes, is something that we see as a
very positive development for the industry.”
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