Negative press about British Banks possible ‘abuse’ of the EFG Scheme, and its predecessor the SFLGS, is further evidence of how difficult it is to ‘stimulate’ SME lending’ from outside the organisation. It is actually naive and distracting from the real aim: to get SME finance flowing as quickly and effectively as possible. Here’s why:
The swing of the pendulum – banks strategies re ‘growing the book’ and ‘managing risk’.
There has always been natural surges in both ‘expansionist and protectionist’ strategies in banks. They now lead to ‘Feast or Famine’ on the High Street for SME’s. In the ‘old days of banking’ this didn’t have such an impact as it worked more locally. Where bank managers had discretion to lend, the business community quickly learnt whether a new bank manager was there to ‘put on business’ or ‘sort out the mistakes of his/her predecessor’. There’s no better example of this than one banker in a well known seaside town who decided to grow his market share of the town’s hotel business. Such was his success that when there was a slight downturn in that sector another manager was sent in to ‘reduce the banks exposure’ which decimated the local businesses. When it worked locally like this it wasn’t such a problem, as with several banks in different stages of this cycle there was always someone on the High St lending. Now however the scale of the banks and the complexity of managing risk on a large scale mean such decisions are centralised and consistent across the bank network. So even minor tweaks in a central credit scoring system affect all lenders on the High St. A ‘conservative’ lending policy becomes a consistent policy across the UK. It is how SME lending risk is now managed (and arguably how it has to be managed)
A ‘Herd Mentality’
The above is coupled with the fact that every aspect of a banks performance is inspected critically by City analysts and the banks monitor each other so closely. It therefore becomes difficult for one bank to step out of line in terms of strategy but where they do, and then enjoy some success, the others soon follow. It is a challenge therefore to get the whole sector moving on a change of policy or strategy.
Internal power and influence
A bank operates by having a finely tuned balance between those generating new lending and those guarding against undue risk. Like any sporting team has a mix of goal scorers and goal defenders. At a time when there is a strategic push to grow SME lending, then in finely balanced decisions the expansionists can ‘trump’ the ‘protectionists’ – mainly because the agreed strategy will have led to suitable people being put into senior positions, along with their entourages. When the bank is in pain from heavy losses the influence and ‘trump card’ moves to those who manage the Underwriters and credit policies. In this way subtle changes in senior roles and messages can take place at Head Office Level.
How a ‘Chink becomes a ray of light’
Have you ever been into a really dark barn without windows? A slight gap in the roof creates a chink of light, which by the time it reaches the dusty floor becomes like a massive spotlight. In the same way, by the time a subtle message from Head Office gets to the front line lenders in a bank it can become a different message indeed, exaggerated or distorted. That leads to front line attitudes and behaviour that are said to be inconsistent with the message originally disseminated from the top.
Do we need Goal Keepers or Goal Scorers? – it depends on how the game is going!
This balance between scoring and stopping goals is a fine one. Arguably the banks have been under siege on all kinds of issues in the SME market and have pulled people back into defence. Some might argue they now just have a team of goalkeepers. Of course the more people they have in their own box the more own goals they are likely to score!
In several of the large banks (particularly RBS & Lloyds) before ‘Humpty fell off the wall’ they had a talented group of experienced managers out there doing new business – and good at it. They were redeployed to look after SME’s in ‘intensive care’ roles. It wasn’t the best use of their skills and it wasn’t what they wanted to be doing. Now those roles are being disbanded and many will be made redundant. A whole army of good ‘goal scorers’ lost after spending the last five years standing next to the goal keeper!
The Human Aspects – an affinity with the Self-Employed/Business Owners/Entrepreneurs
Lending to SME’s involves bankers having human interaction with business owners (however you might want to describe them). In a presentation that I do (‘Business Owners are from Mars, Bank Managers are from ???’) I cover how the psychological profile of both will be very much different. It’s not a criticism of either – it has to be that way for bankers to do their job well and business owners to survive and succeed. However it means there will be times when they struggle to understand each other; how they think and make decisions. This is why SME lending hinges so much on the human interaction. When bankers are dealing with ‘Personal’ customers their needs are just about having a personal bank account – bankers have those too. When bankers are dealing with ‘Corporates’ they are typically dealing with a Finance Director who will be similarly trained and not too far out in how they think. SME banking is where the two types of characters will find it more difficult to deal with each other effectively and it takes the most skill. Yet banks now put some of their most junior lenders into these roles and expect them to deal with decisions remotely.
Government attempts to influence or overcome all this
So with all this going on the Government launches schemes such as SFLGS, EFG etc and expects them to make a difference. What actually happens is:
- A stimulus to SME lending doesn’t actually fit comfortably with where the banks credit policy really sits at that time (although politically that could never be acceptable to announce). So it doesn’t get fully embraced at the top – although clearly it has to be implemented in some way for political reasons.
- The communication (of what tend to be complicated schemes to operate on the front line) is then made even more difficult and messages get distorted
- Face to face discussions between bankers and SME’s, at the front line, about how and why they would lend using a stimulus scheme, when ordinarily they would not be so helpful, are actually difficult to script and control
- The Government monitor the Scheme’s usage and see that one bank is not making expected use of it. The press pick that up too. Subtle pressure is exerted at the top to increase use of the scheme and a subtle message has to be cascaded – which then gets interpreted differently by the time it gets to the front line. Similarly if monitoring picks up that one bank seems to be making ‘too much’ use of the Scheme (and using it to lend in situations where they would have lent anyway on a conventional basis) that message has to be cascaded.
Is it therefore any surprise that:
- The Schemes have been used to different levels across the banking sector (some have been feeling the pain more than others and are not at the same stage in the cycle)
- Front line bankers differ in how good they are at using such Schemes in practice (distorted messages, goal keepers expected to be strikers’etc)
- SME’s have got the wrong messages about what the Scheme is for and how it works (effectiveness in the relationship and communication between bankers and business owners)