The National Loan Guarantee Scheme was a Government initiative which reduced the cost of business loans, hire purchase agreements and commercial leases.
The scheme was launched March 2012 and subsidised up to £40bn in small business loans to help the UK’s Small Businesses.
National Loan Guarantee Scheme
The scheme allowed banks to raise up to £20bn of funding guaranteed by the Government, to lend directly to smaller businesses (who were more reliant on bank finance) at a lower cost than would otherwise be the case.
UK businesses with a turnover of up to £50m were eligible to benefit from the scheme.
Banks applied for Government guarantees against the borrowing within a 2 year window for a fee. They used the guarantee to raise funds at a lower cost.
In order to qualify for the guarantees, banks needed to demonstrate that they could pass the benefits of the guarantee through to cheaper loans (as in the European Investment Bank’s (EIB) well-established ‘Loans for SMEs’ scheme).
Participating banks retained the full credit risk of the loans they make under the scheme.
In many cases the scheme lead to a reduction in the cost of business loans of up to 1 percentage point. A range of banks provided access to the scheme (details below).
Impact on the public finances
The Government reduced the maximum amount available for private sector asset purchases under the Bank of England’s Asset Purchase Facility (APF) by £40bn to £10bn. The reduction of the APF ceiling provided the scope for this package of interventions.
Guarantees issued under the scheme were expected to be contingent liabilities, with no impact on public sector net debt.
The fees received from banks reduced borrowing and debt.
If a bank were to default, Government would have had to meet obligations arising from the guaranteed debt, but as a general creditor would have some claim on the banks assets. Any losses resulting from the guarantee would increase borrowing and debt.
The most likely outcome was that this scheme made a small positive return for the Exchequer.
Introduction of the scheme
The scheme went live on 20 March 2012.
Ensuring that the scheme benefitted business
Similar schemes existed, such as the EIB’s ‘Loans for SMEs’ scheme, which had mechanisms to make sure the cheaper cost of funding is passed through. Similar processes were put in place and participating banks provided the Treasury with a full audit trail.
HM Treasury put in place strong scheme rules, or contractual terms, obliging banks to pass on the lower cost of funding to borrowers. Rates on loans covered by the scheme were expected to be lower than rates on loans to similarly rated companies not covered by the scheme. Banks had to demonstrate that this is the case. Banks were also required to show that all of the Government guaranteed funding is disbursed in loans to target businesses.
HM Treasury considered the range of responses the Government would take if a bank failed to meet its obligations under the scheme.
The proposal was designed to be compatible with the state aid rules.
The scheme was run by the Treasury Group, the provision of guarantees being administered by the United Kingdom Debt Management Office.
Aldermore, Barclays, Santander, Lloyds and Royal Bank of Scotland signed up. HSBC did not signed up.
Source: HM Treasury 2012