Loan Guarantee Scheme (Hansard, 29 July 1982)

§ Mr. MacGregor

I have now completed the review of the first year's operation of the pilot loan guarantee scheme. I have held meetings with the London and Scottish clearing banks and some of the other participating banks, with representatives of small firms organisations and the small firms service, and I have also taken into account the many representations I have received from individual businesses. Department of Industry economists made an interim assessment of the working of the scheme based on a sample telephone survey of borrowers, discussion with the banks and a statistical survey; a summary was published inBritish Business on 16 July and copies of the full survey have been made available in the Library.

There was general agreement among the small firms organisations and the banks that the pilot scheme was operating satisfactorily to meet the objectives originally set for it; and that it is having some catalytic effect on the attitudes of many bank managers towards assessing the financial needs of small firms. On the crucial question of additionality, the sample survey demonstrated that about 80 per cent. of the sample, by number, would either not have been able to raise the finance in the absence of the scheme on any terms, or only by pledging personal assets. Even where finance from elsewhere might have been available, in a further number of cases this would not have been on terms acceptable to the borrowers. This is a very high proportion and indicates that the banks have been generally most careful in their use of the scheme. It is, however, too early in the life of the scheme to be able to judge the longer term success of the scheme in terms of its economic benefits and the viability of businesses supported under it.

I have therefore concluded that no major changes in the scheme are necessary at this stage, in view of the fact that there has been only one year's experience and that neither the vast majority of representations nor the evidence called for them. I shall, however, be taking a number of steps to improve the working of the scheme:

(a) The complaint most strongly expressed by small firms and their organisations is a lack of awareness of the scheme or a lack of knowledge of its details on the part of many bank managers. I am therefore asking the participating banks to reinforce their efforts to put this right.
(b) The scheme is intended to provide additional lending to the small business sector which would not otherwise have taken place. The banks are being asked to remind their managers that this is the objective when asked to refinance facilities already provided from elsewhere.
(c) The main purpose of the scheme is to provide lending for the start-up of new businesses and the expansion of 642 existing businesses. I have had little evidence to suggest that "distress lending" is occurring to any significant extent under the scheme, but the banks will be taking further steps to ensure that it is fully understood that lending for this purpose only would not be in accordance with the scheme's intentions.
(d) I have had a number of representations that the requirement that scheme loans must be drawn down in one lump sum can be onerous to small firms. I have therefore decided to introduce a limited facility for staged draw-downs, which I hope will remove any difficulties in most cases.
(e) I am also setting up arrangements with the full co-operation of the banks for future monitoring of the scheme, and for analysis of the cases of failure, probably using outside consultants.

I am grateful to all those who have participated in this review for their constructive response.