The Bank of England and the HM Treasury on Wednesday announced an extension of the Funding for Lending Scheme (FLS) for one year with an aim to boost credit supply to small businesses.
"The scheme will be extended for one year, meaning that drawings will be permitted until the end of January 2015," the central bank said in a joint statement with the Treasury.
The bank also said that the incentives to boost net lending will now be "heavily skewed towards" small and medium-sized enterprises.
According to the latest plan, new allowances for drawings in the extension period will be calculated on the basis of banks' lending behavior. For every GBP 1 of net lending to SMEs in 2014, banks will be able to draw GBP 5 from the scheme in the extension period.
And to encourage banks to lend to SMEs sooner rather than later, every GBP 1 of net lending to SMEs during the remainder of 2013 will be worth GBP 10 of initial borrowing allowance in 2014. Net lending to other sectors during the remainder of 2013 will count towards the initial borrowing allowance for 2014 pound for pound, BoE said.
Another specific change made to the FLS is that the scheme will be expanded to count lending by banking groups involving financial leasing corporations and factoring corporations, which can be important sources of finance to some SMEs, and certain mortgage and housing credit corporations.
"I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase," BoE Governor Mervyn King said.
He, however, clarified that the extension is "a complement to, not a substitute" for, ensuring that the banks are "adequately capitalised."
"Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses," Chancellor George Osborne said in a joint statement with King. "This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs," he said.
The scheme was originally launched in August last year, giving incentives to banks to increase lending to households and businesses.
by RTT Staff Writer
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