13 October 2010 Last updated at 16:21 ET

UK banks propose £1.5bn fund for small businesses

Banks say that small businesses have simply been asking for fewer loans since the recession began

UK banks have proposed creating a £1.5bn ($2.4bn) fund to invest in small businesses, following government criticism of weak lending.

The "business growth fund" is a key proposal in a report to the Treasury.

The BBC understands that the fund would invest the money - equivalent to about 0.1% of the UK economy's annual output - over a number of years.

Chancellor George Osborne and Business Secretary Vince Cable said it was "an important first step" by the banks.

In a joint statement they added: "We have been absolutely clear that banks need to improve the lending environment for small businesses.

"It is important that the banks now deliver on these plans."

The report comes from the business finance taskforce, which was set up in the summer by six major UK lenders.

Leverage

The BBC understands that the fund would buy up to a 10% stake in the shares of companies with an annual turnover of £10m to £100m.

The fund should also make it easier for small businesses to borrow more money as well, according to our business editor, Robert Peston.

"Those companies that take advantage of the new capital on offer should also be able to lever in additional debt finance," he explains.

A spokesman for the employers' organisation, the CBI, said the fund was the kind of scheme they had been calling for, and would make a helpful contribution to the financing of small companies.

But our business editor cautions that it is important not to get too carried away about the fund's potential.

"I calculate that it will be able to provide risk capital to around 250 middling companies over a number of years," he notes.

The taskforce's recommendations

Access to finance:

• £1.5bn business growth fund
• Support the government's enterprise finance guarantee scheme
• Syndicated loans for mid-sized borrowers
• Improve access to trade finance for small firms
• Explain other sources of finance to declined borrowers
• Ensure wholesale markets support lending capacity as the economy recovers

Customer relations:

• 'Mentors' to provide free business support
• Minimum service levels for the smallest borrowers
• Banks to publish lending rules
• Appeals process for declined loan applicants
• 12 month lead time to discuss loan refinancings

Transparency:

• Regular independent survey of business lending
• Provide broader industry lending data
• Regional 'outreach' events to meet businesses
• Make information on loan products clearer
• New BBA website with useful links for borrowers
• "Round table" for top businessmen and bankers

Lending conundrum

Banks stand accused by the government of providing too few loans at too high a cost to small businesses in the UK since the 2008 financial crisis.

But banks claim that the fall-off in lending is not their fault and has happened because small businesses are choosing to borrow less in response to the weak economy.

The taskforce's job was to "determine to what extent the opposing forces of supply and demand are influencing the flow of finance between banks and businesses", according to the head of the British Bankers' Association (BBA), Angela Knight.

Robert Peston says the new report does tacitly admit that the supply of credit may become a problem in future.

"Our banks became far too dependent in the boom years on raising finance in asset-backed bond markets which still haven't recovered properly," he explains.

If this major source of financing for bank lending fails to recover, then the banks could remain dependent on government financial support, simply in order to maintain - let alone raise - their existing level of lending.

'Mentors'

The taskforce's report also recommended ways to improve customer relations with borrowers and increase the transparency of small business lending.

The BBA said the taskforce had come up with "actions designed to help business thrive and grow".

"As banks we have an obligation to help the UK economy return to growth," said the taskforce's chairman, Barclays chief executive John Varley. "[Small and medium enterprises] are particularly important as a source of job creation and growth."

The CBI said it particularly welcomed the proposal to create a network of "mentors" who would provide free financial know how to small businesses.

"Banks have a big job to rebuild effective relationships with companies," noted the CBI.