EFG Loans - Who has been conned?

Back in January 2009, the (then) Government announced, to great fanfare, the EFG - Enterprise Finance Guarantee - loan facility.

In a nutshell, the Government would provide a 75% guarantee on loans to those businesses who were struggling to raise finance for cashflow or growth.

Like most Government initiatives, the underlying intention was good, but by the time it came to fruition it was mired in so much red tape and so many caveats as to render it effectively unfit for purpose.

A liberal thinker might suggest that the Government are just too distant from business to really understand - whereas a true cynic would say that it was just another attempt to appear to be doing something good whilst passing the responsibility elsewhere - in this case back to the banks.

To look at some highlights

The scheme is aimed at successful businesses which are experiencing difficulty in raising finance. This is the eternal lending conundrum; in every single proposal we see, the business is doing well, but just need a few months to... (it has been said that in every liquidation the directors still believe that they only needed 3 months to sort things out). Of course, many of them will survive, but equally many won't. Sadly, both banks and Government have shown themselves to be fairly inept when making these judgements.

The original scheme was for £600 Million - now extended to £2 billion.  This means that we are asking our failed banks to commit to £1/2 billion of debt they are not entirely comfortable with. Shortly after they have lost billions by imprudent lending..


Banks are allowed to take security, but not over the family home: In lending circles, it is implicit when seeking additional security that you are not entirely comfortable with the primary debt. In reality due to the numerous caveats on the scheme most banks are seeking 100% security whilst using the guarantee as a fall-back.

So far, so good, what exists is basically a very confused view of what constitutes good credit and security - hardly surprising when you consider that no one in Government (any party) has any involvement in business.

However - there is a sting in the tail.

Paperwork: Who has had to fill in Government forms? All of us. Who has had forms returned due to insignificant input errors? Many of us. Who has gone on to be fined for late filing after forms have been returned? A few of us.
Just because this scheme is dressed as a collaboration between Government & banks doesn't exempt it from the confetti factory that is Government paperwork. It is reported that Barclays lost millions under the previous SFLG scheme (which the EFG replaced) due to paperwork inaccuracies. OK, the banks should get it right, but the Government should also honour the spirit rather than the letter of the agreement. (They are not exactly immune from errors themselves).

Bad debt: The very crux of the matter! successful lending isn't about putting money out of the door, it is about recovering it. We have established that there is a lack of clarity in this framework over what constitutes good credit. To protect you, the tax payer, the Government have set a ceiling on what they will repay under the scheme - this is set at 13% of the total loan portfolio (in other words 9.75% of the guarantee amount). To put this in perspective, there were reports of bad debt running as high as 60% under the SFLG scheme which would have put huge debts back on the bank.

The dual rationale for this is:

1. To make sure that the banks lend responsibly.
2. To protect the taxpayer.

All well and good, but various ministers are still banging on about 'forcing banks to lend', which doesn't sit neatly with a prudent policy. It's nice to protect the taxpayer, but it's not really a guarantee, is it?

Just once, wouldn't it be nice if our Government actually did what they promised rather than hiding behind paperwork and rhetoric?