RBS Faces 'Withering' Criticism In SME Review

Royal Bank of Scotland (LSE: RBS.L - news) (RBS) will face heavy criticism this week over its treatment of struggling small businesses in a report that will urge the taxpayer-backed lender to provide new ways for entrepreneurs to finance their companies' growth.

Sky News understands that Sir Andrew Large, the former deputy governor of the Bank of England, will launch a no-holds-barred attack on RBS's attitude towards thousands of small and medium-sized enterprises (SMEs) which found themselves in distress after the banking crisis of 2008.

The report, which will be published alongside an announcement about a broader restructuring of RBS instigated by George Osborne, the Chancellor, will also accuse the bank of depriving its SME customers of access to relationship managers, causing a breakdown in RBS's understanding of their business needs.

"The criticism is not far short of withering," said one person close to Sir Andrew.

Sir Andrew is understood to be planning to recommend that RBS should make available products which allow SME customers to raise capital through selling equity or mezzanine finance rather than relying on conventional borrowing from the bank.

That idea, which has gained some momentum since the recession with the establishment, for example, of the £2.5bn Business Growth Fund, has also been adopted elsewhere in the industry. Santander UK offers mezzanine financing to fast-growing SMEs through a scheme called Breakthrough which aims to address a funding gap frequently faced by many small company-owners.

Sky News revealed on Tuesday that Sir Andrew's review would also call for SME loans applications to be processed more quickly, and for improvements to practices in areas such as data-gathering, in an attempt to improve the targeting of SME lending activity across the UK.

Among his other 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.

Parts of the report will extend beyond RBS to criticise the wider banking industry's dealing with SMEs, according to one person familiar with its contents.

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.

Sky News revealed last 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.