Business failures inevitable, say banks

By Jean Eaglesham and Jane Croft

Banks warned on Thursday it was “inevitable” that businesses would fail in the coming recession, as the government failed to extract any concrete pledges from lenders to improve their treatment of small companies.

The warning will disappoint ministers who had indicated the £37bn part-nationalisation of the banks would lead to concessions for businesses and consumers.

Bank executives including John Varley, chief executive of Barclays, Eric Daniels, chief executive of Lloyds TSB, and Gordon Pell, a director of Royal Bank of Scotland, met Alistair Darling, chancellor, and Lord Mandelson, business secretary, at 11 Downing Street on Thursday for talks on lending practices in the credit crisis. But the talks ended with only a promise that the banks would meet small business groups in coming weeks.

Lord Mandelson told MPs this week he and the chancellor would use the meeting to tackle banks on their lack of “understanding and sensitivity” to the plight of small businesses.

But the British Bankers’ Association, the industry group, said “commercial realities” made it “inevitable that some businesses will not survive” the recession.

Gordon Brown, prime minister, has put support for small businesses at the centre of his banking rescue plan, requiring HBOS, Lloyds TSB and RBS to make lending available at 2007 levels in return for £37bn of taxpayer-funded equity.

The Conservatives said Mr Brown’s pledge on lending was “meaningless”. “The rhetoric does not match the reality on the ground – it’s as deceitful as it is fanciful,” said Alan Duncan, shadow business secretary.

“Lending to small businesses is drying up,” he said. “Even now, banks are cancelling overdraft facilities at two days’ notice and driving many good small firms to the wall.”

Government officials said the talks were “constructive and positive” and not “read the riot act territory”. Ministers did not attempt to impose any constraints on the amounts or costs of their lending, said insiders.

“It was more a general discussion about intent. There were no detailed talks about areas like pricing,” said one. Another said the banks had told ministers they could make loans available but “not force the demand” from a shrinking sector.

Lord Mandelson, who will chair the meeting with small business groups, said the talks would allow business and banks to resolve their differences.

Angela Knight, chief executive of the BBA, said there were limits to the help banks could offer. “What we can’t do unfortunately is reverse a poor economic situation,” she said. “As talk turns to recession, it seems inevitable that some businesses will not survive, even with the best assistance that banks, government and voluntary agencies can give them.”