Cable tells banks to increase lending

Vince Cable, the Business Secretary, warned the banks were "not acting in the national interest".

He expressed his frustration as he prepared to unveil a joint consultation paper with the Treasury setting out options for improving the flow of cash to businesses.

Regional stock exchanges, more government loan guarantees and moves to boost banking system liquidity are among suggestions of ways to increase supplies of much-needed finance.

But Mr Cable will also warn banks that he could ask them to sign up to the type of loan guarantees already agreed by part-nationalised banks RBS and Lloyds if they do not act.

The agreements include penalties on executive remuneration for failures to boost lending but neither of the state-backed institutions has met recent targets.

Aides indicated that forcing banks to sign up remained a "last resort" option and that widening loan guarantees could be offered as a "carrot" to complement the "stick" of loan agreements.

The banking industry insists lending is rising and most business applying for loans are getting them - blaming a lack of demand from businesses concerned about risk not a supply failure.

But after benefiting from a multi-billion taxpayer bailout designed to ensure lending continued, there is enormous political pressure on the industry to do more to help.

Mr Cable said: "We are very worried about the behaviour of the banks.

They are not acting in the national interest. It is a very serious problem and potentially a growing problem.

"I don't think the banks get it.

"What we would question is whether banks should be paying out dividends and bonuses when that money could be used to...support small business lending.

"At the moment we are talking to them in an amicable way and we are monitoring them, but if this doesn't work there are combinations of carrots and sticks that can be employed."

The British Bankers' Association said: "High street banks provide the bulk of lending to UK businesses.

"They lent a net 6.8 billion in June to businesses and, despite the recession, lending to smaller firms is stable and borrowing by larger firms has shown some improvement.

"This reflects competition in the market and looks towards possible growth in demand.

"Banks are willing and able to lend to businesses where they can see how the money will be paid back and where firms have a viable business plan.

"People are still looking for business accounts - around 47,OOO new relationships were established, or accounts switched, in May alone.

"Demand for lending is currently low as businesses are not keen to take on additional borrowing when the economic outcome is uncertain.

"Instead, they are paying back loans and using other sources of funding to finance long-term purchases.

"What is needed now is certainty in the wholesale markets so banks themselves can access a steady stream of affordable finance and are, therefore, better able to support individuals and businesses.

"The BBA will be undertaking studies on ways to improve the wholesale market and we can also reaffirm the banks' commitments to lend to viable businesses whether small, medium sized or larger."

City Minister Mark Hoban will also use a speech today to set out more details of the Government's plans to reform the regulatory system, including axing the Financial Services Authority.