Exclusive: Credit Easing Scheme Sidelined

George Osborne's flagship initiative for boosting lending to small businesses is to be quietly sidelined in a move that risks backfiring on the Coalition as it tries to revive Britain’s flagging economy.

I can exclusively reveal that the Treasury is preparing to wind down the National Loan Guarantee Scheme (NLGS) - or "credit easing" as it was widely dubbed - less than six months after its launch.

Treasury officials have told banks in recent days that the NLGS will be effectively abandoned because it is to be superseded by the "funding-for-lending" scheme that officially launches tomorrow and which could channel as much as £80bn of new lending to households and businesses.

"The scheme is not being formally axed, but it is reasonable to expect that banks will not deem it sensible to continue accessing it," a Whitehall official told me.

The Treasury's official explanation is likely to be that the NLGS has been rendered superfluous by the funding-for-lending initiative.

Yet critics are likely to point out that while SMEs automatically benefited from discounted loans under the NLGS, there is no obligation for banks to pass on the discount under the new programme.

"The Treasury clearly hasn’t thought through the "broken promise" element of scrapping the NLGS," said one banker who has been briefed on the Treasury’s plans.

The details of the credit easing programme were unveiled in the Chancellor's autumn statement last year.

Hailed as the centrepiece of his strategy for helping SMEs drive Britain’s economic revival in his party conference speech, it was launched in March with the aim of providing up to £20bn of Government guarantees on unsecured borrowing by banks, with small and medium-sized businesses (SMEs) that borrowed under the scheme receiving a 1% discount compared to the rate they would receive from the same bank outside the NLGS.

On the day the NLGS launched, Mr Osborne said: "The Government promised to help small businesses get access to lower interest rates.

"Today, we deliver on that promise with a nationwide scheme.

"It’s only because we’ve earned credibility with our deficit reduction plan that we have low interest rates, and it’s only because of this scheme that we can pass the benefits of those low rates onto businesses."

The banks which had begun participating in the NLGS, which include Barclays, Lloyds Banking Group and Royal Bank of Scotland, have drawn down several billion pounds to date, and are expected to lend the remainder of the funding they have accessed.

However, some of the banks had complained that the NLGS was not working effectively because of its structure. As I revealed last month , Santander UK had stopped issuing loans under the NLGS banner because of the difficulty of shifting the resulting Government paper.

The cost to banks of accessing unsecured lending has also been a deterrent to take-up of the NLGS, bankers say.

The funding-for-lending scheme is designed, bankers say, in a smarter way, in that it will reward banks that lend more under it.

Unveiled earlier this month in conjunction with the Bank of England, it would, Mr Osborne said, "aim to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their own home.

"The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm."

Mr Osborne has also in recent weeks launched another guarantee scheme aimed at kickstarting major infrastructure projects.

The Treasury declined to comment on the future of the NLGS today although it is expected to make a statement tomorrow to coincide with the formal opening of funding-for-lending.