Corporate lending to plummet as businesses grapple with credit crunch

Corporate lending will fall sharply this year as businesses find it even tougher to access credit, it has been predicted.

Lending to businesses and households alike is expected to contract sharply in 2012, even though measures have been put in place to attempt to reverse the trend, according to the respected Ernst & Young ITEM Club’s report.

Corporate lending is forecast to drop by 6.2% this year, a similar decline to the one seen last year, while consumer credit will drop by 10.5%, a sharper drop than the 7.6% it forecast three months ago.

Overall lending by the banking sector will drop by 2% in 2012, the report said, sharper than the 1.6% fall seen last year, as the double-dip recession takes its toll.

The Bank of England and the Treasury have put in place a number of policy initiatives recently, such as the “funding for lending” scheme, designed to free up to log jam of credit by giving banks cheap finance on the condition they pass it on to borrowers. However, the ITEM Club has remained cautious about the impact the policy changes will have.

The report said: “Although the schemes should help to lower banks’ cost of funding, some banks may be reluctant to access these schemes for fear of the stigma it could create in financial markets.

“The potential positive impact on lending may also be outweighed by the recent deterioration in the economy. Banks will remain reluctant to lend in this environment and demand for credit is also likely to remain weak across all categories of borrower.”

Loans to the non-financial sector are not expected to keep up with growth in the overall economy until 2014, the report added.

The ITEM Club raised its forecast for corporate write-offs to 2% of outstanding loans due to the prolonged period of recession. This is the highest this rate has been recorded at since the 1990s.

However, this is expected to show the peak of the current economic cycle and the tide is likely to be stemmed by improved conditions next year.

Banks and homeowners continue to be shielded from the increased impairments on mortgages by the period of low interest rates, the report added.