Pass on lower interest rates to customers, Darling tells banks

Treasury to send in auditors to ensure loans are made available to struggling firms

Britain's high street banks are to be forced to undergo individual audits of their lending practices by the Treasury, amid claims they are still failing to lend fairly to cash-strapped businesses.

After a meeting with the heads of Britain's main lenders yesterday, the Chancellor, Alistair Darling, said that each bank would have "someone looking over their shoulder" to ensure they were not failing to pass on record low interest rates to small businesses.

The Treasury hinted last night that the matter would be referred to the Office of Fair Trading (OFT) if a lack of competition in the banking sector was to blame. Mr Darling said the audits, which will be conducted over the next few weeks by the City minister, Paul Myners, would "get to the bottom" of why some smaller businesses were continuing to be subjected to severe lending terms, despite the bank rate sinking to 0.5 per cent, allowing the banks themselves to borrow cheaply.

The Chancellor has no direct power to push down the amount banks charged for borrowing. But the Treasury hopes the audits will apply "moral pressure" to Britain's lenders. Mr Darling was also reacting to fears among small business owners that banks were hiding behind their lobbying body, the British Bankers' Association, rather than having to account individually for their lending practices.

"We need to do this in detail to make sure we get the lending that this country needs," Mr Darling said last night. "I think the advantages of the lower interest rates need to be passed on."

Treasury sources have been concerned that while lending to larger companies and for mortgages was improving, the terms handed to small and medium-sized firms had continued to deteriorate since 2007. MPs are also under pressure from constituents being priced out of loans or subjected to severe terms. While banks argue that lending has increased, the amount that has been handed to small businesses amounts to only one-seventh of total term lending.

Small business groups said the Chancellor was "spot on" in forcing banks to answer individually for their lending practices, but they called for an immediate review of competition in the banking sector, which they believe is stifling progress. The big four high-street lenders – HSBC, Barclays, Lloyds and Royal Bank of Scotland – accounting for more than 90 per cent of lending to small companies.

"Switching lenders has become one of life's great tribulations and 95 per cent of small businesses are locked into deals with the big four high-street lenders," said Stephen Alambritis, chief spokesman for the Federation of Small Businesses. "We would like to see a review that would see the many second and third-tier banks given a greater role in lending to smaller businesses to help lending terms improve."

Philip Hammond, the shadow Chief Secretary to the Treasury, said the Chancellor had created confusion by asking banks to hold more money in reserve while also chastising them for failing to lend. "There is no doubt that the banks must take some of the blame for this fiasco but the Government cannot escape responsibility either," he said. "After all the fuss and fanfare around today's meeting the outcome will not make one jot of difference to struggling businesses."

Small business owners also believe the deals agreed by chief executives and the Chancellor are not being upheld at local level, with branch managers reluctant to begin lending too readily.