More than half of all small firms who applied for bank credit were refused a loan or overdraft, it was claimed.
A new survey found 65% of companies believed the banks were making it more difficult to access finance over the last three months.
And bosses were left waiting an average five weeks for a decision, instead of the recommended 15 days, according to the Irish Small and Medium Enterprise (ISME) quarterly bank watch survey.
Mark Fielding, ISME chief executive, said the results demonstrate that the banking system is not working for SMEs.
"While it may suit the administration to believe the bankers' fiction, the truth of the matter is that banks are deleveraging through curtailing SME lending, thereby sabotaging the economic recovery through pure self-interest," he said.
"The experiment of 'leaving the banks to their own devices' and expecting voluntary codes to solve the problems must now cease.
"Government must take a much more hands-on approach or bankers will continue to distort statistics, delay reform and feel free to terrorise small and medium businesses, in their never-ending drive to maximise their own profits."
Some 1,134 owner managers of SMEs responded to the survey, conducted in the week ending March 8.
It showed 52% of companies who applied for funding were refused credit by their banks.
And 12% who needed finance did not apply, with nearly a third claiming to be discouraged by their bank, 25% afraid of a reduction in existing facilities and 19% were afraid of refusal.