As part of the extension of the FLS, which was launched in August last year, the incentives to boost lending will be “heavily skewed” towards SMEs as the improvement in credit conditions since summer 2012 has been less marked than for larger businesses and households.
Under the scheme, for every £1 of net lending to SMEs in 2014, banks will be able to draw £5 in the extension period.
The Bank of England (BoE) also revealed that in order to encourage banks to lend to SMEs sooner rather than later, every £1 of net lending during the remainder of 2013 will be worth £10 of initial borrowing allowance in 2014.
The FLS, which was originally due to run to January 2014, will also be expanded to count lending by banking groups involving financial leasing corporations and factoring corporations, and certain mortgage and housing credit corporations.
Earlier this week, the shadow business secretary Chuka Umunna claimed that the scheme is not helping smaller firms.
He argued that it had repeated the mistakes of the government’s abandoned credit easing programme Project Merlin by relying on the high street banks.
Business secretary Vince Cable also acknowledged that so far the FLS has failed to help SMEs after the BoE released figures which showed that gross lending to small companies dropped to £18.4 billion in the six months to February 2013, from £19.7 billion in the previous six-month period.
Mervyn King, BoE governor, says that the scheme had contributed to a “sharp fall” in bank funding costs: “The changes announced build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015.
“I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase.”