Is SME lending about to catch a cold?

Posted on Posted in Bank of England, Bibby Financial Services, Commodities, International Monetary Fund, Mark Carney, Oil prices, Stock markets

Amid concerns over oil prices reaching a low of $10 a barrel, stock markets around the world tumbled yesterday. At 4pm (GMT) The Daily Telegraph reported that £60 billion had been wiped off the FTSE 100 as the day’s trading looked set to close 4 per cent down. As market analysts assess the impact, many will point the finger of blame at volatility in the East.

However, the catalyst isn’t just one thing but many: a number of adverse factors, combining to send ripples through global financial markets. Slowing growth in China is clearly one such factor, but there are others.

The International Monetary Fund (IMF)’s downgrade of its global growth forecast, residual effects of the Eurozone crisis, the tumbling price of oil and other commodities and the knock-on effects on markets such as Russia and Brazil are leading to significant investor jitters.

But did we see it coming?

Unfortunately the answer is most likely yes. Alongside others, I warned of the potential of another recession throughout the past year. We have learned little from the 2008 global downturn and I believe it’s only a matter of time before global economic commentators return to banding around the dreaded ‘R’ word.

So what next?

The Governor of the Bank of England has signified that an interest rates rise is likely to be delayed until later in the year (if at all in 2016). It’s clear that Mr Carney is also concerned and is keeping the one remaining – albeit diminished – monetary policy instrument up his sleeve in case things take a severe turn for the worst.  And unless markets recover, there’s a significant possibility that the tides will turn towards another recession. At this stage, UK SME lending will start to catch a cold, as banks begin to retreat and investors pull back from market-based lenders.

Over the past 18 months there has been massive overheating in the supply of finance to SMEs and if UK growth reverses, the loosening of security criteria amongst lenders, coupled with reduced margins, will end in pain. It always has in the past.

This time there is a new breed of lenders, many of which think the rules have changed. However, the vast majority are yet to see a full economic cycle through.

I believe that only those funders who have weathered the storm and come out the other side in the past will succeed in a downturn.

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