George sets out agenda for small businesses: Bank Governor wins applause for 'super Ombudsman' initiative

A NEW prescription for improving the relationship between banks and small businesses was set out yesterday by Eddie George, Governor of the Bank of England, who promised the Bank would mastermind periodic joint reviews to monitor progress.

After leading a six-month study that found faults on both sides of the fence, he called for an acceptance that banks have to charge high-risk customers more and suggested there should be less reliance on 'excessive' overdraft lending.

Mr George said all those involved in the Bank's discussions realised that banks were seeking profit and were not public utilities. 'The need for the banks to price risks realistically is accepted,' he said.

He thought small businesses had exaggerated expectations of their banks but accepted there was insensitivity on the banks' side.

Mr George threw the Bank's weight behind attempts to find a successor for the Unlisted Securities Market, which he said would be a 'valuable complement' to the venture capital market.

The Stock Exchange is studying a successor to the USM, but its slow progress has led the City to suggest that a market should be set up independently.

Mr George said there would be further reviews of progress on his initiative, embracing the CBI, small firm representative bodies, academic experts and the banks.

The Forum of Private Business welcomed the 'courageous step' by the Governor towards becoming what it called a 'super Ombudsman', who would ensure that finance would not be a constraint on small business.

Mr George promised to include a wider specturm of opinion in future consultations and to try to develop criteria for monitoring progress more objectively.

He said that bankers were the 'natural villains of the piece' for small businesses because it is was they who, in the end, withheld the additional credit that might enable the business to turn the corner.

'It is the banks that impose higher margins or additional collateral requirements, or lower borrowing requirements, just when the going gets rough,' he said. 'And it is the banks, quite often, that eventually pull the plug.'

A Bank paper said: 'There are problems of exaggerated expectations on one side and insensitivity on the other. Many small firms have appeared to regard the banks as public utilities rather than as profit-making companies. The banks for their part have sometimes shown a lack of sophistication and sensitivity in their dealings with small businesses, with charging and the taking of security being areas of particular difficulty.'

Mr George made clear he saw overdrafts as a problem, accounting for 56 per cent of small firm debt in the UK and only 14 per cent in Germany. Small firms liked overdrafts because they paid interest only on the sum outstanding, but he approved of the banks' efforts to persuade them to switch to more expensive term loans, which cannot be withdrawn on demand.

He also backed a move among banks to lend on analyses of cash flow and business plans, leaving the taking of security as a 'secondary consideration'.

There was no shortage of bank funds to lend, but banks had become more cautious, with some managers turning down viable propositions, Mr George conceded. A number of banks now monitor managers' rejections to avoid over- caution, he added. The Governor firmly backed the charging of interest on overdue invoices to discourage late payment.

He was concerned about changes to insolvency legislation that could limit the banks' right to enforce floating charges on assets, which could in turn reinforce reluctance to lend.

Mr George emphasised the need for small businesses to improve their financial and management skills and for banks to improve their staff's expertise. He also extolled the virtues of factoring for small businesses.

Hamish McRae, page 27