RBS, GRG and the reasons why small firms couldn't borrow

TWO reports about banking have emerged blinking into the daylight in the past few days and neither makes for pretty reading.

One is entrepreneur Lawrence Tomlinson’s sorry tale about the way a restructuring division of Royal Bank of Scotland, known as GRG, allegedly elbowed viable businesses down a slippery slope into failure which ended with another bank subsidiary, West Register, making a tidy profit on the sale of property assets.

Quite rightly, this grubby episode is now under investigation, and one of the cases the probe would do well to dwell on is the way Kevin Riley’s River Crescent apartment development on the banks of the Trent in Nottingham ended up in administration.

Despite the lurid headlines, it’s actually the other report which matters more. Sir Andrew Large’s ‘RBS Independent Lending Review’ looks at RBS’s lending to SMEs before and after the credit crunch and goes a long way towards explaining why small firms have found it hard to get finance since 2008.

RBS/NatWest isn’t the only bank in the SME lending market and I suspect others will have had similar issues. But it is the biggest player and the failings outlined by Sir Andrew lift the lid on why the problem has occurred.

There isn’t room to cover all the findings of a 36-page report here, but it’s worth dwelling on some of the detail.

For starters, it’s important to understand that lending to small firms shouldn’t go back to pre-crisis proportions for two reasons.

One is that before the crisis they were given too much money. It’s now estimated that by 2009 UK banks in total had loaned as much as £30 billion more than the sector was really capable of repaying – a situation which has now been thrown into reverse, with as much as £35 billion too little since.

In between the two lies what should be a prudent level of SME lending – a total stock of bank lending of around £200-210 billion.

The reason why lending ballooned out of control in the run up to the crunch lies in lax lending policies. In some cases, RBS agreed loans not because of a borrower’s trading performance but because the business owned collateral in the form of a property asset which was rising in value. On that basis, many loans were doomed to failure.

Even after the credit crunch hit and the bank ran into trouble, it didn’t pull the shutters down. In 2009 it had budgeted for a substantial amount of SME lending – but it couldn’t get the money out of the door because of a mix of its own turmoil and an economy which was in no fit state to absorb it.

Unsurprisingly, RBS has since taken some fairly drastic action to try to repair both its balance sheet and the way it operates lending. What may surprise us that some of this drastic action appears astonishingly basic.

RBS acknowledges that in the run-up to the crunch it had casually waved goodbye to experienced relationship managers which hindsight demonstrates it sorely needed. While some wise heads remained, others were ill-equipped to understand businesses or industry sectors and driven by incentives which skewed the decision-making process.

So, RBS has since introduced a training and accreditation programme for relationship managers, including a professional qualification.  But didn’t it have one before?

Similarly, it’s changed the lending criteria, the process for very small businesses beginning with a basic affordability test followed by the kind of credit scoring that routinely goes into a personal loan. For bigger customers the relationship manager can make some delegated decisions, but those that fail his scorecard criteria or go beyond his financial authority are referred to a credit officer who puts smaller, straightforward applications through a data template or bigger, complex ones through a bespoke process.

Finally, its commercial banking operation now includes people with specialist knowledge of certain industry sectors. Again, why on earth wasn’t this standard practice anyway?

Sir Andrew’s report makes clear that since the credit crunch RBS appears to have sorted out all its internal problems. The problem, though, is that this hasn’t translated into more lending – and surveys show that up to a third of SMEs think the bank still isn’t open for business.

When you realise that as recently as last year RBS’s own staff ranked lending a distant third in their list of priorities (well behind getting deposits and protecting against risk) that doesn’t come as a great surprise.

That’s not the only hurdle still standing in the way of a proper level of prudent lending to small firms by RBS

As that pendulum swing in total bank lending to SMEs shows, relationship managers and credit officers have become too risk averse, turning down applications which Sir Andrew says they should be approving.

Worse, the bank’s whole approach to business and commercial lending is split between different divisions and different teams with different objectives.

This goes beyond the fact that some of the people who deal with business most often are not business bankers but retail banking staff. It is where the whole Global Restructuring Group controversy raises its very ugly head.

GRG is meant to manage the bank’s relationship with business and commercial customers whose businesses have hit trouble. But Sir Andrew’s report shows that it is a standalone entity, a profit centre in its own right, and that even the bank’s own business and commercial divisions couldn’t see what was happening to customers who disappeared into it.

The ugly mess which surfaced in the Sunday Times is the end result: it still smacks of the practices of the Fred Goodwin era where the bank’s  profit chasing got out of kilter with the economy and customer need

Sir Andrew’s report suggests that these messes are largely history and that the bank is in much better shape to deliver the service it always should have done – prudent, well-informed lending which made the most of market opportunities.

The problem is that many SMEs just can’t see that yet, and Sir Andrew almost seems puzzled as to why that’s happened.

I’ll give him a clue, here: another one of RBS/NatWest’s post crunch blunders was in waving goodbye to seasoned communications officers working in the regions – trusted people who knew how to get a message across.

It still hasn’t repaired that damage. When I spoke to the bank yesterday about its treatment of Kevin Riley in Nottingham the response came in the form of a statement from Edinburgh. And its two ‘regional’ communications people are based in London.

RBS is a bank which became too big and too centralised in its outlook, property-based profit chasing leaving it blind to a boatload of trouble. Now, it’s probably in a much better position to lend well and deliver more valuable relationships to SME businesses.

Here’s hoping it doesn’t turn into a distant giant again.