Business secretary Vince Cable has warned the banks that the government will take action if they fail to increase lending to small and medium-sized businesses.
Speaking to MPs on the Business Committee, Cable said that the level of lending to small and medium-sized firms continued to be a “serious problem”.
Under the Project Merlin agreement, the UK's four largest banks are required to lend £76bn in 2011 to small companies, with the amount of funding equating to £19bn a quarter. However, the major banking groups are failing to achieve this target set by the government, with figures for the first three months of the year revealing that just £16.8bn was lent.
Cable said: “The chancellor and prime minister have made it clear that if we don't get results, they have said we should take further action with tax on banks.”
He added: "We are trying to get the banks to raise their ambition in lending to SMEs. They were set a 15% growth target and, certainly on the basis of the first quarter, that isn't being met.”
According to Cable, if the banks continue to restrict lending to small firms, which often have no alternative source of funding, the economic recovery could be inhibited.
The business secretary said there was a combination of factors behind the banks’ lack of lending.
One reason was the level of demand, which the banks say is weak, but small firms argue they are being discouraged from approaching banks for finance.
Cable also admitted that the banks were being more cautious in their lending because of the government’s requirement that they hold more capital.