Lending to small businesses receives boost

Government hopes plan will lead to an increase lending to businesses in deprived areas

The government is consulting on new rules for sharing small and medium enterprise (SME) credit data. Photograph: Rana Faure/Corbis

New "challenger" banks will find it easier to check the credit-worthiness of potential business customers under new proposals published by the government , which it hopes will lead to an increase in lending to businesses in deprived areas.

The government is consulting on new rules for sharing small and medium enterprise (SME) credit data, with the aim of making it easier for challenger banks and alternative finance providers to enter the market and provide credit. Banks will be required to share SME credit data through credit reference agencies.

At the moment, the big-four high-street banks control 85% of SME lending. Improved access to credit data through greater competition and innovation in SME lending should improve the cost and quality of services offered.

The move comes as – after pressure from the Co-operative party – aLabour policy review looks at proposals to force banks to publish their lending data down to postcode level and to expand community finance.

Labour has been looking at the US example of banking disclosure and community lending requirements under its community reinvestment act and the home mortgage disclosure act. These laws, expanded under Barack Obama to include business lending, force American banks to disclose what, where and how they lend and force the bigger banks to lend in areas of deprivation and poverty using community banks or credit unions if they wouldn't do it themselves.

Examples of community banks, or Community Development Finance Institutions, as they are officially known in the UK, include Five Lamps, which provides personal and business loans as well as training and advice in north-east England, and the Black Country Reinvestment Society, which provides access to finance for social enterprises and SMEs in the West Midlands.

The government has agreed a voluntary deal with some of the banks to publish some information on their lending. From January 2014, the UK's seven biggest lenders will make quarterly releases showing the outstanding stock of lending committed to customers across loans and overdrafts to SMEs, mortgages and unsecured personal loans. The British Bankers' Association will release aggregated data for the seven participants.

A number of bodies, including the Office of Fair Trading and the Competition Commission, have all highlighted a lack of information about the creditworthiness of SMEs, as well as details about where banks are willing to lend.

Treasury financial secretary Sajid Javid said: "The government is determined to build a banking system that supports Britain's economy and its small and medium sized businesses.

"The best way to deliver this is to increase competition in the sector and remove the barriers to new sources of finance for SMEs. Requiring banks to share data is an important part of creating a more level playing field that will enable more providers to enter the market."

The government said it intended to bring forward legislation on SMEs in the next session of parliament.