Nov. 23 (Bloomberg) -- A year ago, as Britain’s property market began to collapse, housebuilder Persimmon Plc owed 960 million pounds ($1.6 billion). Today, Chief Financial Officer Michael Killoran has slashed that debt by 58 percent.

“It’s safety first,” he said. “With the uncertainty in the markets currently, companies want to be carrying a lower level of gearing.” The credit crunch has made firms like his wary of over-borrowing, said Killoran, who aims to push Persimmon’s debt burden “significantly lower by year-end.”

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, and Lloyds Banking Group Plc, now 43 percent taxpayer-owned, are among U.K. banks facing reluctant borrowers who are opting not to deploy tens of billions of pounds in approved credit. The dampened demand contradicts claims by government and business lobby groups that credit growth may be stymied by banks limiting the supply of loans.

RBS has more than 27 billion pounds in approved corporate lending that’s going unused, said Peter Ibbetson, chairman of small business banking in London. HSBC Holdings Plc said it too was experiencing a “lack of demand” for credit, according to Noel Quinn, its U.K. head of commercial banking. Loan demand from “small- to medium-sized” businesses was down as much as 20 percent and borrowers were accelerating debt repayments, said Stephen Pegg, head of external affairs for Lloyds Banking Group Commercial.

‘Readjusted View’

Lending to companies fell by 4.6 billion pounds in September, sending the 12-month growth rate to its lowest since records began in 1999, the Bank of England said on Nov. 18. Many firms reported continued concerns over access to finance, the central bank said.

“If companies are heavily indebted and face uncertain times, the demand for borrowing will naturally fall off sharply,” said Geoffrey Wood, professor of economics at the Cass Business School in London and a former Bank of England adviser on financial stability. “I’m not at all surprised that bank lending to companies is down. Firms are trying to pay down their debt.”

Persimmon, the U.K.’s third-largest homebuilder by volume, “readjusted its view of the world” in April last year as the cancellation rate on house purchases soared to about 35 percent, prompting it to suspend building on new sites and pay down debt, Killoran said. U.K. house prices have fallen 13 percent since the October 2007 peak, according to the Nationwide house price index.

While cancellations are now down to 16 percent, the York, England-based company said last week that “debt continues to reduce.”

Overdraft Slashed

The homebuilder slashed its bank overdraft by more than half to 21.2 million pounds in the 12 months to June 30 this year, and cut bank loans by 88 percent to 35 million pounds during the same period. Persimmon’s net debt stood at 399 million pounds as of Oct. 31, according to a Nov. 16 statement. Persimmon’s lenders include Lloyds, HSBC and Barclays Plc, all based in London, and Edinburgh-based RBS.

Barratt Developments Plc and Taylor Wimpey Plc, the U.K.’s largest homebuilders, say they too have made efforts to cut borrowings. Barratt’s net debt will be about 700 million pounds by the end of the year, down from 1.42 billion in 2008, the company said in a Nov. 17 statement. Taylor Wimpey forecasts its net debt will be about 800 million pounds, from 1.87 billion, the builder said in a Nov. 4 statement.

Government ministers have expressed concern that curbs on credit may hamper economic growth, and have pressed the banks to continue lending.

‘Maintain Pressure’

“It is very important that each and every bank knows that there is someone looking over their shoulder,” Chancellor of the Exchequer Alistair Darling told journalists on July 27. “We will work intensively at chief executive level to make sure the availability of loans is maintained.”

The House of Commons Treasury Committee said in its April report on the banking crisis “we deplore the behavior of a number of those banks who have received so much public money and behaved in such an insensitive manner” to businesses by denying credit or raising fees.

Government pressure was behind a pledge from RBS to boost lending by 25 billion pounds annually and Lloyds’ by 28 billion pounds over two years. The taxpayer has promised 68 billion pounds to bail out the two banks.

A British Chambers of Commerce survey on Nov. 16 showed that 33 percent of small U.K. companies, most with fewer than 49 employees, have found it harder to obtain credit since June as banks withheld loans.

‘Borrowers Not Lenders’

“Far too many businesses are saying to us that obtaining credit from banks is getting harder,” said Sam Turvey, spokesman at the BCC. “It’s not a black and white picture, it’s very blurred. Some banks have certainly increased efforts to step up lending.”

The dispute mirrors a similar disagreement in the U.S., where economists like James K. Galbraith of the University of Texas at Austin have attributed economic contraction to a reduction in demand.

“It was the borrowers, not the lenders, who last fall precipitated the economic downturn,” he wrote in Washington Monthly’s September issue. “Auto sales didn’t collapse because willing buyers could not get loans: they collapsed because people stopped buying cars. Without collateral, without home equity, without job security, householders decided, en masse and rationally, to save what they could. Without prospects for profit, businesses slashed their investment.”

Record Debt

British consumers, shouldering a record 1.46 trillion-pound debt burden, slightly greater than the country’s 1.45 billion pound annual gross domestic product, are also curbing borrowing. Consumer credit fell for a third month in September, by 262 million pounds, the Bank of England said on Oct. 29.

Half of U.K. companies plan to cut bank financing after the recession and rely instead on funding from bonds and equities, the Confederation of British Industry said today, citing a survey of 66 companies.

HSBC said it had made an extra 1 billion pounds available to businesses in the past year, of which only 600 million has so far been taken up.

“Overall, we are still experiencing a lack of demand for finance from businesses, despite having made funds available,” said HSBC’s Quinn. “Our lending strategy hasn’t changed. We’re as keen to lend to strong, viable businesses as we always have been.”

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: November 23, 2009 05:00 EST