Most bankers insist that they would make a lot more small-business loans if not for two key hurdles beyond their control: Many business owners seeking loans are risky credits, and creditworthy borrowers aren't too eager to add debt.

That's not what policy makers want to hear, but economists and even some small-business advocates agree that the caricature of the tight-fisted banker is unfair - or at least an incomplete explanation for sluggish volume.

"The basic story is that the banks have plenty of money to lend, but just not many bankable applicants," says William Dunkelberg, the chief economist for the National Federation of Independent Business, which represents the interests of small and midsize companies. It has been 35 years since businesses were this reluctant to boost inventories or consider capital expenditures, Dunkelberg says. "The firms that should be borrowing aren't there."

In the third quarter, the volume of small-business loans on banks' balance sheets fell 0.7 percent from the second quarter and 2 percent from a year earlier, to $761 billion, according to data from the Federal Deposit Insurance Corp. That's important because the nation's 27 million small businesses employ roughly half of the private-sector work force and account for about $1 trillion in debt, Federal Reserve data says.

But NFIB data supports the view that those businesses have more on their minds than getting loans. A November survey of the group's membership found that while one-third worry about weak sales, only 4 percent of small-business owners viewed financing as their top concern. Roughly 10 percent reported problems getting a loan.

John Asbury, head of business banking at Regions Financial Corp., said the pipeline of loan applications through the Birmingham, Ala., company is two-thirds what it would be under more normal conditions. "We have seen some pickup from a first-quarter trough, but we are rebounding off a very low base," he said. "Our most sound clients ... are unwilling to make investments because they are unsure about demand for their own products."

Dick Evans, the chairman and CEO of Cullen/Frost Bankers Inc. in San Antonio, says many borrowers are using excess funds to pay down debt, and those who are borrowing only want the bare minimum. "We're all going through the painful process of deleveraging," Evans says.

Though there may be a push from Washington to get more capital into the hands of small businesses, regulators are also intent on making sure banks avoid the same mistakes that led to the financial crisis. Several proposals are circulating for recycling money from the Troubled Asset Relief Program. The American Bankers Association has said it would like to see $5 billion distributed to small banks that can find matching private-equity funds and are willing to commit the funds to small-business lending. The White House has said it wants to expand lending through the Small Business Administration.

Cindy Crotty, the head of commercial banking at KeyCorp in Cleveland, says she is encouraged by plans to expand SBA programs, though skeptical about the potential impact. She says the biggest issue is applicants must have positive cash flow to qualify for SBA loans, but cash flows are often negative or unreliable because of the recession.

Still, bankers are committed to ramping up small-business lending this year. JPMorgan Chase & Co. plans to increase it by $4 billion, and Bank of America Corp. by $5 billion. Regions has realigned compensation to reward bankers making small-business loans and Cullen/Frost is making more prospect calls than a year ago, though it's finding few takers. "What we're finding is that people are in a holding pattern," Evans says.

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