Banks get extra cash to kickstart lending to firms lending

It could release billions of pounds through high-street banks to companies suffering from the credit crunch.

However, talks between the Treasury and banks have yet to come up with a package that would kick-start lending again without taxpayers bearing too much of the risk.

Although £37billion was pumped into the banks as fresh capital in October to save them from going bust, lending to small firms has failed to improve and many have been clobbered by sudden increases in bank charges and the withdrawal of overdraft facilities.

One option is for a new fund based on the existing £1 billion scheme for loans to small firms, in which 75 per cent of the bank loan is made using government money. It means that taxpayers take on three quarters of the risk if the company folds without paying it back.

The Conservatives have proposed a huge expansion of the scheme to £50billion but ministers say that could lead to ordinary commercial bank loans being discouraged.

A report that the Government might lend directly to firms was not recognised by officials today. The deal would in effect see the Government acting as a bank, claimed the Daily Telegraph. A firm with an annual turnover of up to £25 million could borrow 25 per cent of the money it needs from the bank and the rest in "match funding" directly from the Government.

Commons leader Harriet Harman told MPs this week that some form of help was being drawn up. "It's true to say that, while lending figures are starting to show increasing lending to small businesses, there are still businesses having problems," she said.

There is speculation that the Treasury may be forced to give the banks another injection of fresh capital and Treasury insiders are not ruling out the move.

A package of state aid to Jaguar Land Rover is also on the cards. Lord Mandelson is in talks with the Indian-owned company and is sympathetic to a loan because of the firm's importance to jobs and research.

But there were reports that Chancellor Alistair Darling was at odds with Lord Mandelson over the rescue, on the grounds that other firms were equally deserving of a lifeline.

In the Commons, Mr Darling told MPs that any aid should be "mindful" of the fact that private firms should only get help as a last resort. "We also have to regard the interests of taxpayers - that is of critical importance."