Vince Cable, business secretary, is looking at ways to force banks to lend more to businesses and households by increasing competition and demanding clearer pricing rather than simply imposing rigid lending targets.
Before the May election Cable took a tough line, insisting the bailed out banks should be forced to meet targets for loans. Since joining the government, he has also suggested targets could be imposed. He is now said to be aware of difficulties in using simple, rigid targets and is seeking other solutions to the problem of providing credit to businesses.
The consultation period on his discussion paper "Financing a private sector recovery" closed last month and Cable's department for business innovation and skills has been told that stiff targets on banks could crowd out new entrants to the market.
The bailed-out Lloyds Banking Group and Royal Bank of Scotland are the only ones with government-imposed targets to lend to businesses and households. These targets run out in March and Cable, in consultation with the Treasury, needs to decide whether – and how – to replace them.
The coalition agreement sets outs a plan to impose "net" lending targets on RBS and Lloyds, which include loans being repaid as well as new ones granted, rather than the current "gross" target of a combined £94bn. This only assesses new loans and does not measure the speed at which credit is contracting because loans are being repaid.
The business department has been told demand for loans has fallen in the recession and is weighing the impact of that decline on the falling supply of credit to business. Potential borrowers argue loans are too expensive and say they receive little explanation when they are withdrawn.
The Observer, p35