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Credit demand among small firms dropped sharply in the first quarter, according to the Bank of England (Reuters)

Credit availability for small and medium-sized enterprises did not improve in the first three months of the year, as demand for bank lending among these firms fell significantly when it was expected to grow, according to the Bank of England's credit conditions survey for the first quarter.

Secured and unsecured credit availability for households lifted in the first quarter and is expected to expand further in the following three months, while demand for lending at small and large firms was expected to pick up in the second quarter.

"Once again, it's not good news for SMEs from the Bank of England as it seems that the Funding for Lending Scheme (FLS) is improving access to nearly every type of finance except loans to small businesses," said Emmanouil Schizas, senior economic analyst at the Association of Chartered Certified Accountants.

"Looking at the Bank of England's data in detail, though, it's important to note two things: first, that banks have consistently overestimated small businesses' future demand for credit over the past six months - they should be careful not to set lending targets with policymakers that they cannot meet.

"Second, that the banks had expected the price of credit to small businesses to rise significantly over this period - it hasn't, which is probably courtesy of the Bank of England. That should be a small comfort to SME's."

Under FLS, banks are offered discount loans from the BoE to a value tied to their stock lending to the real economy of smaller firms and consumers. As a bank increases its stock lending to the real economy, so does the value of cheap loans - at rates lower than the inter-bank lending market - it is allowed to access.

FLS has been criticised by lawmakers for not freeing up enough affordable credit for SMEs, perceived as being held back from expansion and job creation by a squeeze on bank lending. However, recent data from the BoE and SME finance researcher BDRC Continental suggests there is not enough appetite for lending in the first place.

"Lenders reported a significant decrease in demand for credit from small companies in Q1, a slight reduction in credit demand from medium-sized companies, and little change in demand from large companies," said the BoE credit conditions survey.

"Lower capital investment was cited as the main reason contributing to lower demand overall. Lenders commented that confidence in the economic outlook remained fragile, and that was weighing on demand.

"A few lenders noted that some companies might have been discouraged from applying for credit because of a belief that lenders have a low appetite for risk."

The UK economy has seen its growth forecasts slashed drastically, which is making business cautious about investing.

Office for Budget Responsibility estimates, which the government uses as a guide for future fiscal decisions, were slashed in half to 0.6 percent across the whole of 2013.

Fears over the eurozone have been reignited by the crisis in Cyprus, which almost exited the single currency as it struggled to reach a deal among politicians on how to prop-up its crumbling financial sector.
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