More business lending to boost economy is nonsense, says expert

A London-based financial expert insists that the government’s plans to encourage banks to lend more to businesses are misguided.

Jonathan Davis’ views come as Nick Clegg prepared to accuse the banking sector of sitting on its hands over lending to firms and revealed that the government plans to drive lending by opening up the financial sector to make it more competitive and diverse.

However Davis, managing director of Jonathan Davis Wealth Management, is keen to point out that over-lending is responsible for the ongoing economic malaise and he therefore believes that lending more money to businesses is not the answer.

He said: “For politicians, whoever they are, to say that we need more lending is nonsense because what we actually need is distinctly less lending with less debt in society. With less debt we can actually get the economy moving. All the debt we have is compounding the macro problems.”

Speaking at the Institute of Directors’ annual convention, Clegg is to claim that although the Government cannot dictate who banks lend to, they can exert some pressure on them.

The deputy prime minister’s stance comes after it emerged that combined net lending by Britain’s top five banks shrank every quarter last year despite the Government’s Project Merlin agreement committing them to easing lending, particularly for small businesses.

Clegg will say: “My message to the banks is this: Yes, of course, get your balance sheets in order. Meet the new capital requirements. But don’t lurch to the other extreme at the expense of British business.

“Don’t unnecessarily hoard capital when businesses need loans. Don’t sit on your hands while firms are crying out for cash. And understand that getting credit to businesses is in your interests too.”

But Davis rubbished the notion that businesses need loans to operate. “Businesses are not investing, and they are not investing because they know what’s coming down the pipe,” he said. “The world has changed. We’ve had no economic growth in this country for five years and businesses may say they want to borrow but what they mean is they want to keep themselves going and that’s not business, that’s social security.”

Dr Stephen Bence, of businessfunding.co.uk, believes that funding is vital in keeping businesses ticking over and that alternative methods must be explored.

He said: “The banks have had their chance. They’ve messed up years ago during the banking crisis and are now living with the consequences of that. They have had a lot of government bailout but not only that, they have subsequently had the chance to lend to businesses again and they are not doing so.

“I don’t see why the government should put more good money into existing banks especially when there are plenty of people out there who would be delighted to be managing alternative forms of finance.”