State-owned banks unlikely to meet business lending targets, NAO claims

The UK's two state-owned banks are "likely" to fall short of their business lending targets, the National Audit Office (NAO) has warned.

In its report on the banking sector, it endorses the government bailout of the banking system as "justified" because it says the Treasury has met two of the government’s principal objectives: protecting depositors' money and maintaining the stability of the financial system.

However, the report also warned that Royal Bank of Scotland (RBS) and Lloyds were unlikely to meet the business lending targets set as conditions of the recapitalisation scheme.

RBS is committed to lending an additional £25bn in 2009-10 and Lloyds an extra £14bn.

The report will re-ignite the debate over the role banks should play in the economic recovery, with some arguing that additional bank lending is essential for businesses to recover and, on the other side, commentators warning that banks risk throwing good money after bad.

Last month, enterprise tsar Alan Sugar caused a storm when he said that there was a lot of "moaning from companies I wouldn't lend a penny to".

He added: "They are bust. The moaners are bust. They are bust and they don't need the bank – they need an insolvency practitioner."

The NAO report came as the Forum of Private Businesses (FPB) warned of the risk of a "permanent gap" in funding to small businesses.

It said that there was a "major shortfall" in growth capital for businesses seeking between £2m-10m and called for more options for small firms seeking finance in the form of a government growth fund for small businesses.

The business group also said that banks "must play their part" in lending packages of between £100,000 and £500,000 and that the "steep cost of bank finance must be reduced without delay".

Matt Goodman, FPB policy representative, said: "Firms are likely to require finance from a greater range of sources over the next year.

"Growth funding is certainly welcome but must be accompanied by more sustainable banking lending and public sector support – including a replacement for the Enterprise Finance Guarantee so that they are able to take full advantage of future opportunities."

Business customers are faced with a significantly reduced number of options for banking facilities following, not only the merger between HBOS and Lloyds TSB, but the exit of foreign banks, which accounted for 40% of business funding from the UK market.