FLS £4.4bn drawdown in first two months

The publication showed 35 banks and building societies signed up to the scheme in the first two months, which accounts for over 80% of the stock of lending, supplying net lending of £0.5bn to UK households and businesses.

Paul Fisher, executive director for markets at the Bank, said he was confident that FLS would help the supply of credit.

He said: “The incentives in the scheme are for banks and building societies to cut lending rates and hence lend more to get the cheapest funding. Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions.”

However Fisher said it was too early to use these data as a reliable indication of the impact of the FLS on lending volumes.

In a statement the Bank said it would take time for reduced funding costs to feed through to lending volumes given the typical lags involved in the loan application, approval and drawdown process.

But Darren Sharma, chief executive of Frontline Analysts, disagreed that more time is needed to see the effects of FLS.

He said: “FLS is an elegant idea and may even have worked to a degree though Lloyds, Royal Bank of Scotland and Santander actually shrank their loan books during quarter three. The Bank suggests that more time is needed because applications and approvals for borrowers take time but they don’t take that much time these days.”

And while Sharma believed FLS was a considerable improvement on Project Merlin, an agreement between the government and four of the leading high street banks which covered lending, he said it remained limited in what it was able to achieve.

Sharma added: “Carrying out funding for lending does not preclude other methods of getting funds to businesses and households. Vince Cable’s state bank idea has the potential to play a role in policy.

"My own view is that co-operative lending models could also be encouraged. These were the basis for small business borrowing in the Victorian era.”

Christopher Shaw, chief executive of the alternative finance provider Platform Black, said the scheme’s biggest impact has been to reduce bank’s funding costs but has done little to encourage them to lend.

He said: “Net lending increased by just £0.5bn in the quarter in which the scheme launched which is a fraction of the amount hoped for.

"And while interest rates on mortgage loans have fallen the Bank's figures show that the average rate charged on new corporate loans actually rose in October.”

Shaw added: "Total lending to business continues to fall. Clearly the Funding for Lending Scheme has done nothing to support business yet.”