Sharing risk and reward: Shielding the UK SME sector
By Robert D Kilgour & Prof Ronald MacDonald OBE
Following the decision of the UK government to announce enhanced social distancing measures on 20 March, Chancellor of the Exchequer Rishi Sunak’s £330 billion package of response including loans, tax relief, cash grants and employee salary support, was broadly welcomed by the business community.
However, the uptake of loans to small and medium sized enterprises (SMEs) under the Coronavirus Business Interruption Loan Scheme (CBILS) has been modest, with many companies complaining that a range of factors has prevented them from accessing credit on equitable terms.
This paper proposes that the Chancellor should consider reshaping the loan scheme by:
- Increasing the proportion of CBLIS loans up to £25,000 underwritten by HM Treasury from 80% to 90% as a means of substantially reducing the risk faced by banks in lending to SMEs.
- Exercise HM Treasury’s leverage as the majority shareholder in RBS to mandate the bank, as one of the UK’s largest business lenders, to support SMEs at a far bigger scale than we have seen hitherto.
- Retain the option to complete the nationalisation of RBS if this is what it takes to accelerate competition amongst UK lenders on terms that are accessible to SMEs which need help now.
In our view these measures in combination have the capacity to increase lending to SMEs to levels needed to avoid a collapse in the sector in the wake of the coronavirus crisis, while encouraging the banks to play their part in helping rather than hindering a rapid recovery.
Small businesses (0-49 employees) account for 5.82 million UK companies and approximately 99.3% of the total business population. In addition there are around 35,600 medium-sized businesses (with 50-249 employees) with an additional 0.6% of the total business population. Together SMEs employ three fifths of workers and account for half of turnover in the UK private sector (£2.2 trillion). Some 16.6 million people – 60% of the UK total – work in the SME sector.
It is therefore no exaggeration to say that the fortunes of the SME sector are fundamental to the medium and long term health and competitiveness of the UK economy. On 15 April the British Chambers of Commerce indicated that just 2% of firms surveyed had successfully accessed loans under the CBILS and subsequent media reports suggested that in the period up to 15 April, just £1.1 billion had been lent to around 6,000 SMEs across the UK.
It has been suggested that banks are reluctant to expose their balance sheets to the added risk of loans for companies that may not be able to repay, even though HM Treasury underwrites 80% of their total value up to £25,000 per company. Andrew Bailey, Governor of the Bank of England, has suggested that the Treasury may need to offer 100% guarantees to provide full assurance to the banks and that this would open up the provision of credit to a far higher number of companies in the short term.
- What’s wrong?
The dilemma faced by the banks in providing blanket credit to SMEs, many of which may have entered the current crisis with insufficient cash reserves to weather a short to medium term business interruption, is real. Banks, having been encouraged since the financial crash a decade ago to bolster their own balance sheets by avoiding unsustainable loans, may be forgiven for not throwing prudence to the wind completely to shore up SMEs in the short term.
Such prudence however does not excuse a wholesale failure to engage with the needs of the wider economy on the basis of zero risk for the banks themselves. Having been bailed out by taxpayers at the end of the last decade, precipitating a decade of austerity, our contention is that lenders have an obligation to step up now that they are needed more than ever.
Therefore, if lenders are baulking at loans underwritten by the Treasury at 80%, we would argue that it goes too far to offer 100% guarantees, placing all risk at the door of the taxpayer.
Instead we would propose that the banks and government meet half way, with Treasury guarantees up to 90% and banks liable for the remaining 10% on unsecured loans up to £25,000. This way, lenders which currently have ready access to a wall of cheap historically credit, shoulder a fairer share of the risk of success or failure.
- Creating competition
Even with a far greater guarantee against losses than the already generous 80%, there will be concern that some lenders will still fail to engage with SMEs to the extent needed.
That is why we propose that the Chancellor goes a step further by using its majority shareholding in RBS to mandate the bank to underwrite loans under the CBLIS to 100%. The bank, with its existing network of RBS and NatWest branches, would be instructed to reach out to SMEs in order to, where necessary, make up the shortfall in lending required to keep the sector alive and ready to trade once the economy re-emerges from lockdown.
If the government’s position as majority shareholder in RBS is insufficient in leveraging the influence required to rapidly accelerate lending at 100%, we would suggest that the Chancellor should consider raising the HM Treasury’s equity in the bank from the current figure of 62.4% to 100%.
This would go some way to righting perceived wrongs of the last decade, when RBS was kept at arms-length from government and allowed to focus of stabilisation and Earnings per Share (EPS) at the expense of many small business customers.
Our contention is that more direct state control of the RBS network – even for a short term period – has the capacity to create the conditions to get the entire banking sector working again in the interests of SMEs, by forcing them to compete.
At the moment we are at risk of sleepwalking into a situation where money that can and should be made available by lenders to support SMEs is being withheld because the banks’ unwillingness to accept any risk liability whatsoever. Yet they expect taxpayers to accept those risks and benefit from the increased business being driven their way.
It is right that if lenders can provide cash to businesses cheaply, and they can do it safely with a higher proportion of HM Treasury guarantee, then they should do so with urgency.
And in order to ensure that they go the extra mile in the short timeframe required, the government should retain the option to purchase full control of one of the country’s biggest SME lenders, RBS, to mandate it to engage with small businesses and spur competition across the banking sector as a whole.
Robert D Kilgour, CEO, Dow Investments Plc; Executive Chairman, Renaissance Care Ltd
Professor Ronald MacDonald, Chair of Macroeconomics and International Finance, Adam Smith Business School in the University of Glasgow
 National Statistics: Business population estimates for the UK and regions: 2019 statistical release, Updated 14 January 2020: https://www.gov.uk/government/publications/business-population-estimates-2019/business-population-estimates-for-the-uk-and-regions-2019-statistical-release-html
 Source – BCC Coronavirus Business Impact Tracker: 15 April 2020: https://www.britishchambers.org.uk/news/2020/04/bcc-coronavirus-business-impact-tracker-two-thirds-of-respondents-awaiting-funds-from-furlough-scheme-as-payday-approaches
 The Sunday Times, Crunch time for companies as Rishi Sunak is pushed for 100% loans, 19 April 2020: https://www.thetimes.co.uk/article/crunch-time-for-companies-as-rishi-sunak-is-pushed-for-100-loans-3qtdg85x3
 Source – BBC News, Bank of England boss: Loans need to be sorted out, 17 April 2020: https://www.bbc.co.uk/news/business-52321762