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Osborne's lending plans won't work, warn British banks

FLS expansion will spark a rush of credit to SMEs.

The British banks have warned that the expansion of Funding for Lending Scheme (FLS) will spark a rush of credit to small and medium-sized enterprises (SMEs).

The banks, although welcomed the move to improve the scheme, warned that the scheme would not, on its own, clear the credit bottleneck.

The Bank of England and Treasury officials have been working on plans to extend the FLS programme by one year to 2015. George Osborne and the Bank of England will announce an extension of the scheme by 8 May 2013.

Stephen Pegge, SME markets director at Lloyds Banking Group, told the Financial Times: “If it were to be extended I think that would be helpful, but it is not a panacea.”

The scheme will be expanded beyond the major high street banks and could include invoice finance houses, leasing firms and asset finance groups.

Shadow business secretary Chuka Umunna said: “The principle problem with this scheme is that it has reduced the cost of borrowing for businesses that can already get finance but has not improved access to finance for profitable businesses that can’t get loans at the moment. It has been a failure on that front.”

The Treasury hopes that the extension of the scheme might give the International Monetary Fund (IMF) a reason not to criticise Osborne’s deficit reduction plans.

Osborne said: “What the IMF asked us to do last year was to show flexibility and credibility and ... I demonstrated that flexibility by not chasing the debt target by taking additional measures to support the economy like the housing scheme.”

The IMF, last week, said in the US that Britain should consider imposing less austerity in the face of weak private sector demand and officials indicated they would only change their mind if the Treasury could convince them they had a plan to restore expansion.