Will the credit gap shrink?

Despite recent concerns that government lending is currently too restrictive to re-ignite the economies of the US and Europe, there are indications that things may in fact be getting back on track. Results from eight quarterly surveys conducted by FICO over the last year (four in EMEA in collaboration with Efma, and a further four in the US with PRMIA) show that bankers feel the gap in supply and demand for credit for both consumers and small businesses is shrinking when compared with last year in both regions. This is good news. It shows that bankers are starting to be positive about lending again, writes Daniel Melo

Despite recent concerns that government lending is currently too restrictive to re-ignite the economies of the US and Europe, there are indications that things may in fact be getting back on track. Results from eight quarterly surveys conducted by FICO over the last year (four in EMEA in collaboration with Efma, and a further four in the US with PRMIA) show that bankers feel the gap in supply and demand for credit for both consumers and small businesses is shrinking when compared with last year in both regions. This is good news. It shows that bankers are starting to be positive about lending again, writes Daniel Melo

The results table below shows that in March 2012 the consumer credit gap in Europe was forecast to be 8% and in the US 18%. In comparison in March 2013 the credit gap forecast stood at just 4% in Europe and 10% in the US. Demand for and supply of credit increased throughout the year, and in both regions the supply of credit increased more so than demand, although demand still continues to outweigh supply.

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A similar story is told by the table below which looks at the credit gap for SMEs in Europe and the US. As with the consumer credit gap there have been fluctuations over the last year, but when compared overall to the year before, the credit gap in both regions has reduced significantly, suggesting that they may be turning a corner. Not only are the bankers surveyed generally optimistic about the credit market, they are expecting the credit situation to improve significantly for small business borrowers.

The availability of credit for small businesses has been a concern throughout the economic recovery. Better risk management practices and strategies can help to reduce the credit gap and will help banks to better select which SMEs should receive credit approvals. The upbeat sentiment reflected in these results, in particular in the US, makes me think it’s possible that we’ll see small businesses picking up the pace of investing and hiring in the months ahead.

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Credit demand and supply is a useful key indicator of the state of an economy; the smaller the ‘credit gap’, the more positive the sentiment. If businesses and consumers are granted the credit they request, it’s likely that the economy of that particular region is reasonably stable. Perhaps then there is finally a light at the end of the tunnel?