The National Loan Guarantee Scheme is the latest offering from the Government to ease the Credit Crunch by encouraging lending to small and medium sizes business (SME,s) with turnover of less than £50m. A total of £50bn has been earmarked for the scheme to be lent to SME’s ove the next 2 years. Most of the high street banks have signed up to this scheme including Royal Bank of Scotland (mainly its NatWest arm), Lloyds, Barclays, Santander and the new specialist lender, Aldermore Bank.

Contrary to what people may think the Government is not lending its own money but only guaranteeing the loans made to the banks. This enables the banks to borrow from the money markets at a reduced rate as the loan is underwritten by the government. By borrowing at a reduced rate the bank is able to lend to SME’s at a rate generally 1% lower than would normally be available to them.

The banks are still responsible for their lending decisions and loans that default are the responsibility of the banks. This is the crux of the matter in that if a company was refused a loan before because the banks deemed the loan was too risky then nothings changed, the company will still be refused the loan. The only pressure on the banks to lend is the same as before under Project Merlin, which did not amount to much more loans being made. This is what the HM Treasury have to say about the National Loan Guarantee Scheme.