Credit where it's due

Credit and debit cards Image copyright Getty Images
Image caption Small business lending has been under scrutiny from Professor Griggs

Do you pay off your credit card bill each month? If so, you're harming your credit rating.

The problem is, I'm told, that you're showing how well you avoid debt, not how well you handle it.

And the computer systems that dispense credit scorings by the millions don't register your canniness. They only care about your recklessness.

What if you shop around online for the best deal on credit? Apparently, that gets noticed too, and may not help.

I learned this from Prof Russel Griggs, the man who probably has a better insight into the state of British banking than anyone else.

That's not because he's got access to any bank chief executive's office, but because he's (and please excuse the Dilbertesque jargon) drilling down into the banks.

He's spending much of his time with relationship managers at branch level, and he's doing so across the main lenders, where he's finding markedly different lending cultures.

He was appointed last April as the independent reviewer of small business lending, a post recommended by the Vickers commission on banking, and taken up by the UK Government.

Awfully cross

The Dumfriesshire-based businessman, who found himself at the heart of the crisis and of government when he was representing the CBI's smaller business interests, recorded an interview with me for the Business Scotland programme on BBC Radio Scotland.

And he makes the business of lending to business sound a lot more interesting than you might suspect.

He won't produce his first annual report until summer. It may reflect on the mood inside banks, where he says those at branch level - well below the big bonus pay-outs - are "awfully cross" and "a bit hurt" about the way they're portrayed. Many of these individuals have seen their own retirement nest-eggs lose 90% of value as their employers' share prices collapsed.

It sounds like the professor will report on the banks' willingness to engage in this process, and that they're learning a lot from the challenge he's putting to them, in the 1,700 cases so far brought to him and his team of auditors.

Of them, 40% of lending decisions have been overturned - not by his ruling, but after other lending managers, usually more senior, have looked again at the decisions, including the rates and fees, which have been handed out to small business customers.

The banks are, says the professor, finding that they're missing lending opportunities by making decisions too early, and failing to take account of the whole picture of a company rather than the bits registered in a computerised form-filling, box-ticking process.

It can be hard, after all, even for the best of computers to make judgements on management capacity, let alone the vital element of affordability.

Bad risk

There are lessons there for business, about being more realistic about the overdraft they can expect. One company he cited has £320,000 turnover, and a £200,000 overdraft. That's not just the bank's fault or problem.

He's still dealing with the mopping up from the abrupt freezing of credit in late 2008, which he said was unlike any previous recession he's seen. Without doing anything, up to 80,000 companies went from good risk to bad risk overnight.

There are messages also for business applicants to negotiate hard, not simply to accept deferentially, to remember there's competition to make loans down the high street, and to keep talking to your bank's relationship managers. Being in the loop is preferable to nasty surprises.

So there are helpful lessons to both business and banks in what's going on in this review process. However, Russel Griggs gave a broad hint that he's aiming his fire at the credit ratings agencies.

That may include Fitch, Moody's and Standard & Poor, which have been to the fore in the grading of Eurozone sovereign bonds, having been posted missing on the big banks' exposure to toxic assets.

But they have much less to do with smaller companies. That's where Experian and Equifax dominate.

Blunt scoring

They are the organisations that mine data in extraordinary quantity and detail, to build up a credit history and rating of behaviour throughout smaller companies and individuals. They are where banks often turn to judge your ability to handle debt.

And that's why a history of not having had debt is unhelpful to those wishing to know how you might handle it in future.

Prof Griggs is heading towards a crunch meeting with credit rating agencies some time in spring. He sounds unimpressed by what they do, and how they do it.

Credit scoring is far too blunt an instrument, he says. And they lack regulation. I wouldn't be surprised to find a recommendation that they should be regulated, even though those who have looked at ways to do so have struggled to find the means.

You can hear Prof Grigg's interview on Business Scotland, available on BBC iPlayer and by free download.