A few SME’s are claiming that they were ‘mis-sold’ loans using the EFG scheme. Isn’t this what happens when Government attempts to ‘disrupt’ the bank lending disciplines?
I was once the ‘custodian’ for a lenders involvement with SFLGS – which involved ‘policing’ its use and liaising with (what was) the Dti. Their focus was to see the scheme used so that they could claim that they were helping with ‘access to finance’. If they perceived it was being ‘under-used’ then there was pressure to write more loans using the scheme. If our lending was high and out of proportion to others (accounting for market share) there was a need to root out potential abuse of the scheme. Hence we were obliged to make a certain use of the scheme, regardless of the type and flow of applications which came across the desks at the front line, and based on Government expectations.
Move then to the front line banker’s world. If a proposition comes across the desk and it is judged to be ‘viable’, then you would want to lend regardless of the security position (albeit that you would tie in the business owners as far as you could). If it wasn’t considered viable then you wouldn’t lend at all, regardless of the strength of any security. Both these Gov’t schemes are therefore aimed at propositions that are considered viable, but possibly marginally so, such that the loan wouldn’t go ahead without the extra safety net of the Gov’t Guarantee.
Here the irony begins: the Gov’t schemes come with extra fees for the borrower. Hence a proposition which might be ‘leaning towards marginal’ becomes less viable because of the additional costs of servicing the Scheme Loan.
As a result, these Schemes are very helpful but only to a very small number of applicants. That is fine until political or market expectations are that the scheme is used more. Then it will inevitably be applied (for the wrong reasons) to applications that are:
- Viable and would be funded anyway (leading to additional and unnecessary costs for the borrower)
- Considered too risky for normal criteria (hence the Gov’t Guarantee is then of more use to the bank than the borrower)
There are some great success stories coming out of use of the EFG & SFLGS schemes. However it is inevitable that some cases on the fringes will be subject to close scrutiny when things go wrong