By Barry Edwards

Banker’s SME lending review

The RBS independent lending review by Sir Andrew Large and the consultancy Oliver Wyman was published on the 1st of November. It was commissioned to look at the SME market in particular and it made some revealing observations about the RBS approach which were certainly not flattering.

You can read the complete report by clicking on the link below:-


The recommendations proposed by Sir Andrew are similar to the paper we have posted on this site called ‘Venture Beyond’ which you can read if you click on the title in the right hand column of this page. Most of the advice is based around support, good monitoring and proper customer management together with flexible funding arrangements which you would think is an obvious and sensible way to manage this market for a bank.

Unfortunately, none of the large banks adopt this strategy completely and it is a little unfair to single out RBS as the sole culprit. The good news is that RBS have stated that they will adopt the recommendations made in the report and intend to implement them as soon as possible. The problem is that the bank staff employed by RBS and the other large banks do not have sufficient experience to fully implement the recommendations and are unlikely to obtain those skills in the near future since it can only really be learnt over many years of dealing with SME’s and their specific difficulties.

There has been, for some time, a disconnection between the business world and the funding requirements it needs to develop and grow. Apart from the largest companies, the world of banking is not fit for purpose for the corporate market below the quoted companies’ radar and government are very aware of this dilemma. This subject does not make the headlines and it does not win elections for any party; anything to do with SME’s is relegated to the department for Business Innovation and Skills (BIS) that does not have the resources to make a real difference.

Despite their good intentions, the BIS have not been able to kick-start funding for the SME market or stimulate more lending by the banks. Everything they do is based around investing tiny amounts, compared to the size of the market, being placed with a wide range of lenders to encourage other funds to follow their example. This policy has received some publicity but it has not inspired many other organisations to commit to this market although the alternative finance providers are gaining recognition as we have discussed in previous weekly comments.

Therefore, we have a situation where the government is willing but has very limited resources and bankers who do not have the skills to deliver the recommendations that this report is proposing. In case you think I am being very pessimistic, below is the wording of the report concerning people (I have underlined the particularly relevant phrases):-


An assessment has been made of the skill levels of RBS’s Relationship Managers and Credit Officers, who –together – are responsible for making decisions on whether to lend amounts above a minimum threshold. The ways in which behaviours of individuals are affected by the environment, culture and incentives that RBS has put in place around them have also been observed.

RBS has invested in the skills of its Relationship Managers: RBS has already done much to restore skills that had been eroded in the run up to the crisis. It has introduced a training and accreditation programme for its Relationship Managers and has also begun a programme to ensure that its Relationship Managers hold a professional bankers qualification. The introduction of “Sector specialist” teams has helped create teams with a better understanding of customers’ businesses, and the “Working With You” programme seeks to ensure that Relationship Managers spend four days a year on site with their customers. The overall skill level of Relationship Managers is broadly in line with industry standards.

Relationship Manager skills remain variable and lower than required: However, Relationship Managers’ credit analysis skills – which enable them to structure applications on behalf of their customers – remain variable and generally lower than required to support RBS’s aspiration of market leadership based on a relationship based strategy.

Credit Officers could be more creative when structuring deals: The skills of the Credit Officers are broadly in line with industry standards and, in some areas, exceed them. Nevertheless, limited flexibility and creativity in both Credit Officers and Relationship Mangers was observed when structuring deals, and a greater sense of “mutual endeavour” is desirable.

Compared to the pre-crisis period, there is less encouragement to generate lending applications: Changes in the way Relationship Managers are appraised have reduced the propensity to submit lending applications that might be rejected within the credit process. In addition, changes in objectives for Credit Officers have established sanctions for approving applications that subsequently turn bad.

These factors have resulted in risk aversion at an individual level: In combination with the way in which the Policy & Guideline framework was initially introduced as outlined in Section 4.1, it is concluded that these factors have together caused Relationship Managers and Credit Officers – at a personal level – to become more risk averse than they need to be, avoiding some lending that – at a portfolio level – is in fact within the risk appetite of RBS. These factors have also frustrated Relationship Managers, who feel unable to realise their own potential for business development.

Relationship Managers have less time for business development: Relationship Managers have primary responsibility for developing new lending business. However, they now spend less time dedicated to this activity than is ideal because of other responsibilities, including, for example, the collection and verification of customer data to support RBS’s obligations to the regulator and the more rigorous credit processes now in place.

As you can see it is awfully polite banker’s terminology but it is very clear the lending and customer interface delivery process within the bank is ineffective and this is similar in most other banks. The important point to remember here is that Sir Andrew Large and the consultancy Oliver Wyman are highly respected insiders in financial circles. They have highlighted the crucial failure of banks to manage their responsibility of supporting SME’s in this country and this report should be the framework for correcting the problems that currently exist.

In my view, this could not be a more revealing description of the failure of the banking business to fund the potential growth of many thousands of companies that could have expanded their businesses and employ many people. Although this is not the main point of the report, it is clear there has been and still is a disconnection between the financial community and the SME market. Let’s hope this report will have the impact it should have on the banking world.

That’s all for this week, more observations next week.

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