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Funding for Lending 'not helping UK economy'

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The introduction of the Funding for Lending Scheme (FLS) last year was intended to incentivise banks to lend more cash in Britain to help get the economy going - but its effectiveness so far has been questioned.

Bank of England data has indicated that FLS has failed so far to raise financing levels, as the fourth quarter of 2012 saw a drop of £2.425 billion in the net amount of lending to households and small businesses.

Commenting on this, founder and chief executive of personal asset lender Borro Paul Aitken said: "Once again we are faced with figures showing banks are reducing lending, not in fact boosting the loans which individuals and small businesses need. It's a shame that we are yet to see any evidence the Funding for Lending initiative is working."

This, he added, is a reason many small and medium enterprises are looking to other sources of finance.

Net lending figures did vary markedly between different banks and building societies. For example, the figure rose by £1.90 billion at Barclays and £1.77 billion at Nationwide. By contrast, it fell by £3.12 billion at Lloyds Group, £2.83 billion at Santander and £1.68 billion at RBS Group.

It could be that it will take some time for the impact of FLS to be felt, with those banks bailed out by the government being the most notable for their lower lending. Moreover, the Bank did note that "it takes time for reduced funding costs to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process".

Sooner or later, however, the economy will need to see the extra lending coming forth, as this will help generate the consumer spending and business investment to enable a more sustained expansion of Britain's gross domestic product.

One area where there does seem to have been a clear improvement is in the level of mortgage lending. The Council of Mortgage Lenders, for example, believes it has helped in this process. Even after it published January figures showing a drop in lending, the body remained upbeat, with analyst Caroline Purdey saying: "We still expect the funding for lending scheme to lift activity over coming months."

So when it comes to the effectiveness of FLS, it seems opinion is very much divided. The picture may become much clearer over the months ahead.

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