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Should Banks Insure Loans to Small Businesses?

Small Business InsurancePhillip Blond, ResPublica director says “Mandatory loan to insure loans could build confidence in lenders to lend”. According to an influential think tank, “Banks should be forced to insure loans to small and medium sized businesses to guard against bankruptcies and encourage lending”. ResPublica has come to prominence as David Cameron’s adviser on localism and mutualising public sector organisations. They said: “Consumer lending should also be protected with Insurance to encourage a wide range of lenders to make up a shortfall in the UK’s market for loans that amount to £40bn a year”. ResPublica is thinking along the lines that these loans could potentially unlock billions in customer spend.

Blond has also expressed his concern that the government’s effort to kick-start lending had failed to bridge the gap between businesses and consumers that want to borrow and anxious banks that are nervous about lending money. The Bank of England’s figures show that lending to businesses has continued to decrease despite the Central Bank’s ‘funding for lending’ scheme that makes cheap loans available to a number of banks, building societies and leasing companies.

Blond thinks that the Treasury could make a large impact immediately if it told state-owned banks to adopt the scheme. However, the Treasury officials are likely to be sceptical of the idea. It could be viewed as another iteration of the infamous Payment Protection Insurance (PPI) scheme, which rapidly turned into a huge financial services sector scandal, costing banks and lenders over £10bn in compensation – and littering our phones and televisions with constant adverts for a long period of time. PPI could potentially add up to a third of the cost of a loan, causing thousands of borrowers to declare themselves bankrupt.

Paul Walsh, the boss of CUNA said: “Although not everybody offering PPI was miss-selling it, everybody is paying the price of the widespread deception that went on – consumers, lenders, businesses and ultimately the UK economy. The time has arrived for lenders to proactively respond to their consumer’s needs and help them overcome their fears and address this inertia in the lending market."

James Savery, 25 June 2013

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