25 November 2013

The full report of the Independent Lending Review of the Royal Bank of Scotland’s SME business has been published today. This follows the release of the Summary and Recommendations of the Review on Friday 1st November.

The Review was chaired by Sir Andrew Large, and undertaken together with the management consultancy firm Oliver Wyman.

Please click here to view the full report

1 November 2013

The Independent Lending Review chaired by Sir Andrew Large, and undertaken together with the management consultancy firm Oliver Wyman, has recommended reforms to Royal Bank of Scotland’s SME business. Recommendations detailed in the Review include:

  • Addressing structural issues in the SME business by:
    • Reducing internal complexity and establishing clear lines of responsibility
    • Establishing realistic lending objectives that are consistent with its ability to deliver them
    • Embedding safeguards to ensure that customers in financial difficulty receive appropriate treatment
  • Increasing productivity by:
    • Addressing risk aversion among SME staff
    • Improving the business development approach
    • Simplifying and accelerating the lending process
    • Improving customer communication

Sir Andrew Large said:

"RBS deserves credit for the way it has tackled some of the shortcomings in its SME business during a period when the group was battling for survival. The bank has also invested heavily to lay the foundations for sustainable growth. However, there is much that still needs to be done. The bank has failed to meet its own SME lending targets, partly because they were unrealistic and also because of weaknesses in its lending operations."

The objectives of the Independent Lending Review are to clarify what RBS has done with its SME business and the rationale for these actions, then to make recommendations for improvements. A Summary and Recommendations were published today, ahead of publication of the full report in late November 2013. Among the main conclusions are:

  • Having lent aggressively in the run-up to the crisis, RBS’s lending volumes to SMEs have fallen faster than peers and its market share has contracted from an unsustainably high share in 2008, to a level more consistent with its customer base
  • Much of this decline is associated with the legacy of the 2008 crisis which engulfed RBS. However, the contraction in lending has "overshot", and RBS has not lent as much as it intended to SMEs
  • At present RBS generates lending from one in four SMEs that approach the bank with an enquiry, a marginally lower conversion rate than at peers. The main driver of the difference between RBS and peers is the extent to which RBS "screens out" customer enquiries at the pre-application stage. RBS is as successful as its peers at converting formal applications into lending
  • A perception has risen among some SMEs that RBS is unwilling to lend. A recent customer survey showed that 30% of SMEs disagreed with the statement that RBS was "open for lending"
  • RBS has not been successful in managing the expectations of external stakeholders

The report identified a number of reasons for RBS failing to hit its lending targets, including:

  • RBS’s SME lending objectives were not consistent with its tougher credit standards, and limits on certain types of lending (especially to the Commercial Real Estate sector) introduced to manage portfolio risks
  • Internal restructuring had a negative impact by fragmenting responsibility for SME lending
  • The ongoing SME business has had difficulty in finding the best way to deploy its people and investment budget to originate and win the lending opportunities that are available to it
  • Although risk management policies are in line with good prudential standards, customer-facing staff and Credit Officers are risk averse in their behavior
  • RBS lending process is time consuming and loan applications take longer than at other banks
  • Credit skills of customer-facing staff that were neglected in the run up to the financial crisis have improved, but remain variable
  • Until relatively recently, deposit gathering was prioritised over lending

The Review also noted that a small proportion of customers have a strongly negative perception of RBS, in particular related to the treatment of customers in financial distress, and recommends that the bank look into these specific concerns carefully.

Sir Andrew Large said:

"RBS should look afresh at the manner in which it delivers lending to SMEs, and make sure that the various components of its offering to customers are aligned. There is no 'silver bullet' to address the issues that have been raised, but addressing the recommendations set out in the Review would make a real difference to RBS and its SME customers."