Bizezia Managing Director, Martin Pollins, derides the notion that banks are supporting businesses with low interest rates.
There is talk afoot about interest rates going up. But hold on - new figures show that interest rates charged by banks and other lenders on small loans have already reached their highest level for more than a decade, despite the base rate being at a record low.
Before the credit crunch (thought to have started on 9 August 2007 when bad news from French bank, BNP Paribas, triggered a sharp rise in the cost of credit) banks and other providers charged about 8.6% on a £5,000 loan. Now, according to financial information group Moneyfacts, the average is 12.7% - the highest level since May 2000.
Moneyfacts blames the interest hike on the increased risk of people defaulting on the loans and added that lenders had previously offset the cost of low loan rates by selling controversial payment protection insurance. Now, the banking industry face a £7bn to £9bn compensation bill for mis-selling the cover. Furthermore, the high level of bad publicity about the product is likely to lead to a sharp fall in the number of people taking it out in future, which means it can no longer be relied upon for further profits.
The Bank of England, which admittedly monitors a slightly different range of lenders, said earlier this month that interest rates on £5,000 loans had hit a record high of 15.58% during April 2011 after soaring by a massive 3.2% during the month - the biggest recorded monthly change since it first began collecting the data 6 years ago. People looking to borrow higher sums of money are a little better off, with average interest rates on loans of more than £10,000 falling during April for the fourth consecutive month to 9.01%.
The Bank of England base rate has been 0.5% since March 2009. The gap between base rate (0.5%) and actual interest charged (more than 12% on average) is over 11.5% - or 23 times base rate.
If you go back to August 2007 (see above), base rate was 5.75%, but actual rates being charged were 8.6% - a gap of only 2.85%, or about half of base rate. So what this means is that today, lenders want a profit margin of 11.5% whereas before the credit crunch, they managed comfortably on a profit margin of 2.85%. Who can be surprised that British businesses do not want to take out loans to expand their enterprises?
How banks can use base rate as a weapon to cream money from savers on the one hand by paying so little on deposits (sometimes as low as 0.1%) while taking advantage of borrowers on the other, is beyond comprehension.
Equally, it is futile to be fining banks for mis-selling or mishandling of complaints (Bank of Scotland was in the news this week having been fined £3.5m for failing to deal adequately with complaints relating to its retail investment products). The fine is only met by squeezed borrowers in the form of ever escalating margins. The punishment needs to sit where it is due – firmly in the personal lap of the directors.
The Government called on Project Merlin to get the banks to lend more… interestingly, the story of Geoffrey of Monmouth’s Merlin is thought to be based on the Welsh Myrddin, a wise man who went mad after the battle of Arfderydd and retired to the Celidon Forest. Hmm.
