Page last updated at 15:05 GMT, Friday, 31 July 2009 16:05 UK

RBS 'is missing lending target'

By Nils Blythe
Business correspondent, BBC News

RBS logo

Royal Bank of Scotland is not keeping to a pledge to raise business lending in the UK, the BBC has learnt.

In February, the bank agreed to increase business lending by £16bn in return for further taxpayer support.

Financial figures to be announced next Friday will show that RBS has made little progress towards the target.

And the Bank of England has questioned whether taxpayer support for UK banks should give the government more direct power over lending policies.

The government owns 70% of RBS and 43% of Lloyds, with the shares now held by an independent body called UK Financial Investments - UKFI.

This level of ownership could have been used to provide the government with huge influence over the bank's lending decisions.

But ministers decided to ask UKFI to behave like a commercial shareholder which wants to maximise the value of the holdings, rather than using its power to force the banks to boost lending in the interests of the economy as a whole.

Instead, the government received pledges from RBS and Lloyds that they would increase lending by specific amounts.

RBS agreed to provide an extra £9bn of mortgage lending and £16bn of business lending in 2009.

RBS is understood to have made good progress in raising mortgage lending. But it has struggled to fulfil the business lending commitment.

'Open for business'

The bank argues that some business customers have chosen to pay back loans, which has affected its overall figures. And that demand for some types of loan have fallen.

Part of the RBS response is a charm offensive. Newspaper adverts have been placed saying that that the bank is "open for business".

In a published letter from chief executive Stephen Hester, customers are invited to "call into your local RBS, Natwest or Ulster Bank branch, or speak to your relationship manager".

RBS is not alone in struggling to boost its business lending. Recent figures from the British Bankers Association showed that lending to business by the main banks has fallen by an average of £580m a month over the last six months.

The Chancellor, Alistair Darling, recently urged the banks to play their part in promoting economic recovery. But critics argue that the government should not have put itself in the position of having to persuade banks to act in particular ways.

Total taxpayer support for the UK banking sector amounts to around £1.3 trillion and if Britain's wider economic interest is served by an increase in lending, banks should not have been allowed to drag their feet.

The Treasury has always argued that banks must be allowed to make lending decisions on a commercial basis. But officials point out that the commitments to increase overall lending made by Lloyds and RBS are legally binding.

Businesses approaching these banks in the coming months should remember that they are now under real pressure to lend.

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