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Big banks under fire as lending to SMEs fails to meet targets

Uk bank lending to businesses fell once again in May - raising fresh fears that lending targets agreed with the Government will be missed.

Bank lending to private non-financial companies fell by £1.8bn last month, compared to a drop of £700m in April, the Bank of England said.

The UK's top banks earlier this year said they would increase lending available to small and medium sized enterprise (SMEs) under the Project Merlin agreement.

But separate figures, published last month by the Bank, showed lending to SMEs was falling short and prompted accusations that banks were failing to do enough to help. Shortly after the figures were published, Business Secretary Vince Cable told MPs the Government is prepared to increase taxation on UK banks if they fail to back small businesses.

Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander UK lent £16.8bn to small and medium enterprises (SMEs) in the first three months of the year, according to earlier figures from the Bank.

Under the Project Merlin agreement the banks said they would increase lending to SMEs to £76bn this year, which equates to £19bn in the first quarter.

The figures showed the banks were on course to meet overall business lending targets of £190bn this year, equal to £47.5bn for the quarter, as they lent £47.3bn in the period.

The Bank has recently reported that small firms perceive credit conditions to be "very tight" and many are reluctant to approach banks in case it leads to an increase in the cost of existing borrowings.

Howard Archer, chief UK and European economist at IHS Global Insight, said the further and increased drop in net lending to non-financial companies was influenced by low demand for credit and by many companies looking to pay down debt.