Suffering firms dealt cash blow

Banks are hardening their attitude to the engineering industry and cutting their lending to small automotive component firms in response to the downturn in the sector.

The move is likely to blunt the effect of interest rate cuts made by the Bank of England in order to stimulate growth and investment.

Reports this week said Barclays had decided to reduce its exposure to the industry, and had developed a checklist of concerns that its regional managers should address before offering new loans to automotive suppliers.

Shabab Quadar, economist at the EEF, said there were indications that a number of banks have recently been reducing their exposure to small engineering firms. ‘It’s a dangerous precedent to single out particular sectors. There is already a trend for large automotive manufacturers to source more of their components from overseas, and this will place an even greater squeeze on cashflows.’

The worry is that the trend could spread to the majority of banks, and start to affect firms in other areas of engineering. ‘Investment plans aside, which have already been hit, this will put engineering firms’ cashflow and day-to-day operations under increasing pressure,’ said Quadar.

The trend is also likely to reduce the impact of the Bank of England’s recent decision to cut interest rates by a quarter of a percentage point to 5%, to provide a boost for the beleaguered industry.

Neil Mackinnon, analyst at Merrill Lynch, said banks often tighten their lending criteria during economic slumps, at a time when many firms’ cashflow problems are intensifying. ‘This can offset moves to bring borrowing costs lower, and it is a problem firms have consistently faced in economic downturns. It leaves many small and medium-sized firms in a very difficult position.’

Commercial banks do not have a very good track record in providing help in this area, and while the Bank of England is expected to cut interest rates further within the next few months, manufacturers’ cashflow problems are likely to intensify.

‘It looks as though lower interest rates do not offer immediate benefits. If the banks are tightening their lending criteria and not extending loan facilities, firms will lose the benefits of lower interest rates,’ said MacKinnon.

The Sunday Telegraph reported at the weekend it had seen a letter from a Barclays regional director to a customer, warning him that the bank was reducing its exposure to the automotive industry and telling him he should change banks within the next six months.

Barclays has a 25% share of the small business market. A bank spokesman, Andrew Routledge, could not deny the letter had been sent out to a customer, but said it did not represent a new policy by the bank.

‘This is a specific case which does not follow Barclays’ standard policy, and the guidelines are not a response to the general economic slowdown in manufacturing,’ he said.

Routledge dismissed suggestions of a checklist, but said the bank would look carefully at a company’s order books and customer base before offering a loan, no matter what sector the company is in.

‘In this sector a lot of companies are producing a very small number of products, so we would particularly want to make sure they would follow through with any loans if they were putting all their eggs in one basket.’

If banks are reducing their exposure to the sector it could have particular implications for the West Midlands home to a large number of automotive component suppliers, which has already been hard hit by cutbacks in car production.

Recent figures from consultant PricewaterhouseCoopers show the region could lose up to 40,000 jobs as a result of a fall in manufacturing output, while the EEF has warned that the area has now been in decline for over a year.

David Botterill, chief executive of EEF West Midlands branch, said a number of banks were starting to look quite closely at automotive component makers in the region, in particular smaller firms. ‘There is anecdotal evidence from some of our member companies that the banks’ attitudes are hardening, and they are tightening their lines of credit.’

But despite the claims of component suppliers that they are facing a much tougher time from their bank managers, lenders have denied they are shunning the sector.

A spokeswoman for Lloyds TSB said the bank does not have a policy of restricting loans to particular industries. ‘We do not highlight a specific sector and say we are not going to offer loans to firms in that sector. It is the individual company we look at.’

The Royal Bank of Scotland, the UK’s biggest corporate lender, also said it had not changed its stance on lending to the automotive industry, and did not see any reason to do so.

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