Economy adapting to ‘new normal’?

It may be hard get­ting a com­mer­cial loan right now, but things are going to improve. Right? Alas, maybe not. There is a school of thought which says that the cur­rent harsh lend­ing envi­ron­ment may be the “new nor­mal”. This means that, even as the econ­o­my starts to grow, it will be no eas­i­er to secure com­mer­cial loans. The age of easy cred­it is over.

Tim Kirk, head of finan­cial ser­vices at BDO, says we’d bet­ter get used to this aus­tere world. “In the future, bor­row­ing will become more expen­sive. Lend­ing cri­te­ria will get tougher. Inter­est rates will go up. I think entre­pre­neurs will need to change their mind­sets. They need to under­stand that they are not going to get easy cred­it.” How­ev­er, think­ing of this as a “new nor­mal” can be mis­lead­ing, he says, as we’ve been liv­ing in a false par­adise. “We have gone through an unusu­al peri­od of low inter­est rates, huge inflows of cash from emerg­ing mar­kets and gen­er­ous lend­ing cri­te­ria. The sit­u­a­tion now is mere­ly return­ing to the old nor­mal,” says Mr Kirk.

Inter­est rates will be a major con­trib­u­tor to the squeeze. Antho­ny Evans, pro­fes­sor at ESCP Europe Busi­ness School and a mem­ber of the Insti­tute of Eco­nom­ic Affairs’ shad­ow mon­e­tary pol­i­cy com­mit­tee, says he’s sur­prised that the Bank of Eng­land has been able to keep rates so low for so long. “I am one of the econ­o­mists who thought that quan­ti­ta­tive eas­ing and low inter­est rates would lead to infla­tion,” he says. “They will do, but so far the Bank of Eng­land and the gov­ern­ment have able to live in a world of delu­sion. When the effects catch up with us, inter­est rates will rise and entre­pre­neurs will need to accept that the bar is going to be raised for get­ting cred­it.”

The new cap­i­tal require­ments imposed by the Basel III rules and the Vick­ers report on bank­ing will both reduce the avail­abil­i­ty of loans and con­tribute to high­er costs. An Adam Smith Insti­tute report, authored by Tim Ambler, says of the new rules that “large cus­tomers will not be affect­ed, but the SMEs [small and medi­um enter­pris­es] and the more volatile busi­ness­es will bear the brunt of both a low­er avail­abil­i­ty of loans and high­er rates of inter­est”. The British Bankers’ Asso­ci­a­tion con­curs. Which is grim news for Britain’s entre­pre­neurs.

Inter­est rates will be a major con­trib­u­tor to the squeeze

So is there any chink of light to alle­vi­ate this mis­ery? Per­haps, as new lenders are enter­ing the mar­ket. In the prop­er­ty mar­ket, for exam­ple, pen­sion funds are seek­ing to fund deals which pre­vi­ous­ly were dom­i­nat­ed by banks. “There are peo­ple who are work­ing out that, if they can lend to rel­a­tive­ly benign risks on orig­i­na­tion at 400 basis points plus, why not do it?” says Chris de Pury, part­ner at Berwin Leighton Pais­ner. “So you are see­ing an increas­ing num­ber of insti­tu­tions – M&G, Pru­den­tial, Avi­va and AIG – are get­ting into senior debt. You will see some of those tak­ing up the slack vacat­ed by the Scot­tish and Irish banks, and some of the Ger­mans.”

But he warns: “Will it be suf­fi­cient to bridge the refi­nanc­ings over the next five years? No. Will it be enough to com­pen­sate for the fact that banks are being hit by Basel III and the high­er reg­u­la­to­ry require­ments? No.”

Para­dox­i­cal­ly, high­er lend­ing cri­te­ria may be help­ful to the strongest busi­ness­es. Pro­fes­sor Evans says: “When inter­est rates go up, we will see a weed­ing out of busi­ness. The win­ners will be prof­itable, respon­si­ble busi­ness­es.”

ANALYSIS

Ethical lending does the right thing

Pub­lic con­cern over the behav­iour of tra­di­tion­al banks and bankers has led to a boom in eth­i­cal lend­ing. The Co-oper­a­tive Bank, the eth­i­cal bank Tri­o­dos and the Char­i­ty Bank have all enjoyed strong growth in account deposits over the past few years. Tri­o­dos (slo­gan “Greed down; hap­pi­ness up”) grew its loan book 34 per cent last year and expects to grow it by a fur­ther 20 per cent this year.

The Co-oper­a­tive Bank saw a 73 per cent increase in the num­ber of new cur­rent accounts opened in the first half of 2012. At one point, the bank was open­ing 15,000 new accounts a week, 90 per cent of which were cus­tomers migrat­ing from the big five high street banks.

Char­i­ty Bank, which lends to char­i­ties, social enter­pris­es and com­mu­ni­ty organ­i­sa­tions, and is itself a char­i­ty, last year enjoyed a 20 per cent rise in deposits. Chief exec­u­tive Mal­colm Hay­day says the con­cept of eth­i­cal lend­ing is an easy sell in the cur­rent cli­mate. “Investors want to put their mon­ey with insti­tu­tions which are trans­par­ent. They want to be able to go to bed at night know­ing their mon­ey is doing good.”

It is not just the lend­ing cri­te­ria that dif­fer with the self-styled eth­i­cal banks, but the rela­tion­ship ethos. “We don’t make quick deci­sions,” says Mr Hay­day. “Nor­mal­ly we’ll get an inquiry over the phone. We invite them to come for a chat. We go through a whole check­list. If they work in a com­mu­ni­ty, we go and meet that com­mu­ni­ty. If they work with dis­abled peo­ple, we meet those peo­ple. We meet trustees and the man­age­ment. It is not unusu­al for us to say a loan is too ear­ly for your organ­i­sa­tion, but come back in two years. Cus­tomers see us as a crit­i­cal friend, which is total­ly dif­fer­ent to the way high street banks oper­ate.”

This approach results in rock-bot­tom default rates. The total loan loss rate at Char­i­ty Bank is 0.05 per cent. This is par­tic­u­lar­ly remark­able as many bor­row­ers turn to the bank after being turned down by tra­di­tion­al lenders and they run the organ­i­sa­tions part-time or as trustees. The eth­i­cal mod­el is now seen as suf­fi­cient­ly robust to attract insti­tu­tion­al investors, such as char­i­ta­ble trusts and funds. Mr Hay­day adds: “Big funds used to invest their mon­ey in tra­di­tion­al port­fo­lios and give the prof­its to char­i­ty. We are see­ing a shift, so that they invest with us so we can help char­i­ties direct­ly.”