The short-term lending market has weathered the pandemic reasonably well, however much of it is down to government initiatives. That is now set to continue for the rest of 2021 thanks to the launch of two new schemes. The Recovery Loan Scheme ensures that the many small and medium-sized enterprises that have been badly impacted by the pandemic can access funding that would otherwise not be available, thereby reducing bankruptcies and defaults. The Mortgage Guarantee Scheme will boost liquidity in the house building loan segment and will indirectly boost demand for development loans.
When the pandemic hit, traditional economic stabilising mechanisms kicked in, such as liquidity provision through the Bank of England. The impact of such mechanisms typically trickles down gradually and usually benefits the large banks most, by the time the increased liquidity reaches the SME segment, it is often too late.
Last year, bridging and specialist lenders saw funding lines being pulled, leading to the temporary closure and even the demise of some lenders. As many of these bridging lenders typically serve SMEs, the market withdrawal of those lenders amplified the impact of the pandemic on a significant number of smaller businesses.
What was different about last year, however, was that the government took the decision not to wait for Bank of England stimulus to trickle down to the SME segment. Instead, it launched direct intervention models such as the Coronavirus Business Interruption Lending Scheme. So far £22bn has been lent to 92,449 businesses under CBILS and a staggering £45bn to 1.5 million businesses via Bounce Back Loans.
These programmes have saved many SMEs and, equally importantly, enhanced liquidity in the lending market and reduced bankruptcies and hence default rates.
It is to the credit of the government that not only the large banks could participate in these schemes, but all SME lenders that meet the accreditation standards, drawing on the huge diversity within the SME lending ecosystem. The government was able to do that thanks to the strong infrastructure of the British Business Bank, an instrument which was not available at the time of the financial crisis.
This approach is in marked difference to the reaction following the financial crisis, where there was no direct government intervention in the SME market, and it took a very long time for central bank intervention to trickle down, leading to the unnecessary, and often unfair, demise of many SMEs.
It is clear from the 2021 budget announcement that the government seeks to assist economic recovery by building on its successful 2020 initiatives. This will also have an important impact on the 2021 bridging market.
The Recovery Loan Scheme will replace CBILS. It will allow facilities of up to £10m per business, doubling the current CBILS limit. It will also remove the turnover restriction, eliminate the payment of first-year interest rates by government and maintain the 80 per cent government guarantee to the lenders. It is the latter that helps the lenders obtain funding for certain commercial lending activities that may otherwise still be difficult to get in the current environment.
In addition, the government is introducing a Mortgage Guarantee Scheme for lenders which will very much improve the availability of mortgages for buyers with small deposits and therefore allow many more to get on the housing ladder. Lenders that provide mortgages to homebuyers who can only afford a five per cent deposit will benefit from a government guarantee on those mortgages. Most of the large regulated mortgage lenders including Lloyds, NatWest, Santander, Barclays and HSBC have already signed up.
The housing market will be helped further by the stamp duty holiday extension until 30 June 2021.
All these announcements in the 2021 budget will have a hugely positive impact on the short-term lending market segment. The Mortgage Guarantee Scheme will ensure that exits are available which will provide confidence to bridge lenders. It will also give an indirect boost to developers and house builders, assuring strong demand for development loans. The Recovery Loan Scheme will ensure it is less likely SMEs heavily affected by Covid are cut off from funding, keeping bankruptcies and hence default rates down. It will also help many smaller lenders to attract funding that would otherwise not be available.
In summary, we expect a strong year for the short-term lending segment, very much supported by general market confidence returning on the back of a very successful vaccination drive and the crucial government lending schemes.
Johan Groothaert is chief executive of Fiduciam
