Darling to Call on U.K. Banks to Offer Cheaper Company Loans

By Gonzalo Vina

July 27 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling will call on Britain’s banks to reduce the cost of loans to small companies as he seeks to prevent the economy from slipping further into recession.

In a meeting at the Treasury in London today, Darling will tell chief executive officers from companies including Royal Bank of Scotland Group Plc and Barclays Plc that they must do more to help the economy in return for government assistance.

“I am extremely concerned about what the banks are doing for small companies,” Darling told BBC Television yesterday. “What companies are being charged seems to have gone up relative to what they have to pay.”

The U.K. economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in the recession. The British Bankers’ Association said loans to small companies increased by 23 percent in June compared with a monthly average for the year.

Angela Knight, chief executive of the BBA, told BBC News television that banks are “stepping up” lending. Figures compiled by the lobbying group showed loans to companies with sales of less than 1 million pounds ($1.6 million) increased to 366 million pounds in June compared with a monthly average of 297 million pounds this year.

The BBA said later in a written statement that capital requirements imposed by the government that are twice as high as those of other countries and a higher default risk were pushing up lending costs.

“Thousands of businesses likely to go to the wall, so how can banks in all conscience be irresponsible over their lending policies?” said David Buik, Market Analyst at of BGC Partners in London. “Ill considered remarks by the Chancellor from the cheap seats will fall on very deaf ears. He cannot have it both ways.”

Darling said a government rescue, which totals 1.4 trillion pounds in capital and potential liabilities to taxpayers, wasn’t an act of charity and that lenders must do more to support economic activity.

Rescue Costs

“They’ve got to live up to the promises they made,” he said.

The Libor rate at which banks lend to each other over 12- months was 1.46 percent on July 24. The annual interest rate for HSBC Plc’s Small Business Loan for loan up to 25,000 pounds can cost as much as 19.9 percent.

The Treasury took majority stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc in addition to nationalizing Northern Rock Plc and Bradford & Bingley Plc after financial turmoil brought the industry near collapse in 2007.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net.