Do bank lending statistics give a clear picture?

Full Fact's investigation into small business credit conditions yesterday has caused something of a stir.

While our conclusion suggested that though there had been only a small reduction in net lending to small businesses since the dawning of the financial armageddon over two years ago, questions were raised abou the usefulness of these figures.

Since then, we have had an extremely helpful response from the Association of Chartered Certified Accountants (ACCA) who not only provided us with further figures on lending to small businesses, but pointed out some potential pitfalls in the data.

The ACCA compiles its own statistics on the lending levels to businesses but, unlike the figures from the British Bankers Association that Full Fact examined yesterday, these are weighted to consider variations in inflation and changes in the number of businesses in the economy.

Nevertheless the findings still paint a picture of stagnating, if not slightly falling, levels of lending. From July 2007 until the most recent figures, small business term lending was up one per cent, but total lending was down three per cent.

There are however limits to the conclusions that can be drawn from the ACCA figures.

It was suggested by the British Bankers Association that the slowdown in lending was a product of falling demand for credit from businesses. Yet if small businesses are making such a fuss about a lack of credit, it would seem odd that demand is waning.

The Federation of Small Businesses suggested the apparent fall in demand was down to businesses giving up on the possibility of loans before they had even asked, therefore holding down loan application figures.

However such 'discouraged demand' is nigh-impossible to substantiate with statistics — but the ACCA suggested some indicators which lend some credibility to the theory.

-Firstly, Bank of England data shows there has been a rise in firms using credit cards as a source of funding, the implication being that this is used as a means of finance because loans from banks are hard to come by.

- Secondly the Bank of England data also shows that in recent years banks have largely underestimated demand for credit, which could point towards discouraged demand as firms anticipated to apply for credit fail to do so.

Emmanouil Schizas, Senior Policy Advisor at ACCA, told us that as a result of this figures for bank approval rates could be "suspiciously high", as it is only those who feel they stand a chance of getting credit who will apply in the first place, meaning the number of firms turned down is much less.

Such measures are only hints of possible discouraged demand in the credit market, and are speculative, but they nevertheless are another reason to tread carefully around any reports about lending to businesses.

As Full Fact set out yesterday, there are problems with drawing too strong conclusions from net lending data, given that the amount can be affected by repayments as well as loans.

But even if we look at gross lending figures, the slowdown in the rate of new loans discussed yesterday, could still potentially be distorted by discouraged demand.

Ultimately getting any handle on the position of small businesses vis-a-vis their banks is fraught with difficulty, particularly through the prism of mainstream press reporting.

Even the British Bankers Association acknowledges that because the small business sector covers a large number of firms representing a diverse range of sectors and situations there will be no one size fits all picture of the availability of credit to SMEs.

As a BBA analyst explained to us: "There will be different stories depending on the size of business or even the industry in which it operates. Some sectors will be more resilient to the recession than others".

With such a mixed bag of data, it seems that competing claims over the lack of credit will not be resolved any time soon.