RBS Faces Large Call For SME Lending Reform

The taxpayer-backed Royal Bank of Scotland (LSE: RBS.L - news) (RBS) will face demands to overhaul its small business lending practices later this week following a four-month review led by a former deputy governor of the Bank of England.

Sky News has learnt that Sir Andrew Large, who was appointed to lead the review in July, will criticise many of the processes and quality of decision-making surrounding RBS's lending to smaller companies in recent years.

RBS, which is 82%-owned by the taxpayer, is the largest UK lender to small and medium-sized businesses (SMEs) but has faced relentless attacks since its £45.5bn rescue in 2008 for its perceived failure to do more to coax the economy into a faster recovery.

"There will be a focus on the skills of those who are responsible for SME lending decisions," said a person familiar with Sir Andrew's review.

"It is a highly critical report," said another.

The paper is to be published on Friday and will be timed to coincide with the announcement of a wider restructuring of RBS's business that was commissioned by George Osborne, the Chancellor, earlier this year.

Sky News understands that Sir Andrew's review will extend beyond RBS to call for an overhaul of many of the entire banking industry's practices in areas such as data-gathering, in an attempt to improve the targeting of SME lending activity across the UK.

Among dozens of recommendations, Sir Andrew is also expected to call for executive remuneration to be tied more closely to the success of RBS's SME lending activities, and will urge much faster decisions to be given to small business-owners about loan applications.

Successive initiatives launched by the Coalition since the 2010 general election, including formal lending targets for RBS and the Project Merlin manifesto in 2011, have failed to stimulate a significant upturn in SME lending.

The continued political debate about RBS's SME lending prompted Stephen Hester, RBS's former chief executive, to declare the availability of £20bn of balance sheet capacity for small companies to utilise. Much of this money has not been accessed by SMEs, according to an RBS insider.

Data published on Tuesday showed that SME lending across the industry accelerated during the three months to the end of September.

“This is a strong increase in the amount of new lending to small businesses - they borrowed more than £10 billion from banks in the last quarter - that’s 11% higher than the same quarter last year," said Richard Woolhouse, chief economist at the British Bankers' Association.

“Banks are in the business of lending and these figures show that many firms are realising that there has seldom been a cheaper time to apply for credit.”

The broader review of RBS's business will fall short of a full break-up of the bank.

Sky News revealed at the weekend that tens of billions of pounds of loans will be placed in a rebranded internal bad bank, with a series of asset sales accelerated by Ross McEwan, its new chief executive.

RBS and a spokesman for Sir Andrew declined to comment.