Small businesses frustrated by a lack of financial support from banks are winning almost four out of every ten appeals under a new system that allows them to challenge rejected loan applications.
An independent arbitrator, Russel Griggs, revealed yesterday that 39.5 per cent of 2,177 appeals against banks had been successful in the first year of a scheme overseeing disputes.
Professor Griggs, a former CBI official, was appointed under last year’s Project Merlin pact between the Government and the City, with a remit to adjudicate when companies with sales of up to £25 million feel that they have been unfairly turned away by banks. Most appeals were from retailers, construction companies, restaurants and hotels complaining about limits placed on overdrafts or credit cards. Half of the amounts in dispute were sums of less than £5,000, although a few were higher than £1 million.
“Banks need to learn how to adapt to a new environment in which they have to be cautious, rather than confident,” said Professor Griggs, who criticised the way that opaque personal credit scores were used by banks in loan decisions.
“When you’re a start-up and you go into a bank, the first thing they evaluate is your personal credit score,” said Professor Griggs. “I don’t think anybody really understands how those credit scores are put together.”
Advertisement
Low credit scores were the reason for 39 per cent of loan refusals that were subject to appeal. Professor Griggs queried why people who were not on electoral rolls are marked down for credit, and why tiny infringements of overdraft limits were treated as severely as big breaches.
He added that credit rating agencies should be less punitive towards people who unsuccessfully applied for credit through online applications, as casual form-filling on the internet had become far more commonplace.
Phil McCabe, a spokesman for the Forum of Private Businesses, welcomed the arbitrator’s intervention. “The criteria used for credit scores is a mysterious witches’ brew. There’s a lack of standardisation of which measures are used,”he said.
Mr McCabe said that the high level of successful loan appeals showed that the banks were “not gauging risk accurately”. He suggested that the number of disputes was linked to the closure of neighbourhood banks, where loan officers have a personal relationship with clients. About 1,200 communities in Britain no longer have banks, while 890 have a single outlet.
The British Bankers’ Association said that the appeals process was working well and had generated “a better dialogue between banks and customers”. It said that 86 per cent of lending applications were approved, with most small businesses getting the credit they needed.
Advertisement
The Treasury has created a £20 billion “credit easing” initiative, using government-backed loans to get money flowing to small businesses. Banks are facing increasing competition in the area. Wonga, the payday loans company, recently announced that it was entering the small business market.
The Federation of Small Businesses said that banks were adopting a “formulaic, tick-box approach” to assessing applications.