Recent regulatory developments, spearheaded by the Prudential Regulation Authority (PRA), have the potential to reshape the landscape of SME financing.
The Basel 3.1 regulations, now under consideration by the PRA, signal a paradigm shift in SME lending.
Central to the proposition, is the removal of the SME Supporting Factor, a provision favouring SME lending.
Historically, this provision has been instrumental in promoting SME growth by allowing lenders to hold a relatively lower capital reserve for such loans.
With its removal, lenders might be compelled to maintain higher capital against their SME loans, an alteration that could stifle the growth trajectory of banks dedicated to SMEs.
Indeed, extrapolating from recent research, we could see an alarming £44bn contraction in SME lending.
UK vs. The World: Where Do We Stand?
Drawing a comparison with international counterparts, especially the EU, the UK’s proposed stance is decidedly more stringent.
Secured loans, which traditionally carry lower risks due to collateral, would paradoxically require banks to reserve more capital compared to unsecured loans.
Such a strategy not only contradicts international norms but also poses a question: Are we inadvertently suppressing the growth engine of our economy at a pivotal moment?
Challenges Ahead and the Quest for International Competitiveness
A balance between prudential regulation and fostering growth is essential. However, the emerging narrative suggests a conflict.
The PRA’s approach might inadvertently make the UK’s lending sector less robust compared to our European neighbours.
As we manoeuvre the post-Brexit landscape, the necessity to seize growth opportunities has never been more pronounced.
While challenges loom, there’s room for constructive change. A consensus among lenders points to the revision of the deposit insurance threshold tailored for SMEs.
Presently, many businesses hold funds exceeding the Financial Services Compensation Scheme’s (FSCS) £85,000 cap.
Elevating this limit could assuage concerns about banking with challenger institutions rather than established high-street banks.
A higher cap might also foster competition, nudging banks towards offering more competitive rates.
Summary
While the impending regulatory revisions present hurdles, they also offer an opportunity to reevaluate and fortify the UK’s commitment to SMEs.
By striking a balance between safeguarding financial stability and fostering growth, the UK can carve out a path that champions its SMEs while ensuring a robust, competitive financial landscape.
Small businesses access unsecured, fast funding from Got Capital. As an alternative lender, Got Capital offers financing solutions specifically designed for and catered to the needs of SMEs.
