Following wide speculation that FLS would be lengthened, the BoE has confirmed that the scheme will be extended by one year to the end of January 2015 and announced specific changes designed to ensure that SMEs benefit from the scheme.
The Bank of England has devised a system where the amount of FLS funding banks will be allowed to draw during the one-year extension will be directly linked to their lending behaviour over the next 20 months.
In the one-year extension banks will be able to draw £10 for every £1 of net lending to SMEs during the remainder of 2013, while net lending to SMEs in 2014 will be rewarded with additional funding at a ratio of five-to-one.
Loans to households, large businesses and non-bank credit providers will remain at the original pound-for-pound rate in a bid to encourage weighted lending to SMEs for the remainder of the scheme.
Net lending figures will be split by sector and published during 2014, in line with business minister Michael Fallon’s demands for greater transparency. Banks will also be required to report net lending to non-bank credit providers including financial leasing and factoring corporations, which can be useful sources of finance for SMEs.
FLS, launched in August 2012, has come under fire for its failings to lend to the "real economy", a point noted by the outgoing governor of the Bank of England Mervyn King and George Osborne in an exchange of emails.
While large businesses and home buyers appear to have benefitted from FLS, Osborne admitted "the impact of the scheme on small and medium businesses has taken longer to develop".
King said: "The aim is to increase the incentives for banks to lend to SMEs, as they have experienced a less marked easing in credit conditions since the original scheme was launched.
"The scheme has given banks confidence that they will be able to access funding on reasonable terms throughout 2013. The extension of the FLS will help to maintain easier funding conditions for banks into 2015, and thereby help to support credit conditions and the recovery in our economy."
