Banks blame legacy issues for lending rise failure Britain's banks yesterday insisted they are ramping up lending to businesses after official figures showed a flagship scheme to inject cheap money into the economy appeared to be failing. Banks and building societies participating in the Funding for Lending Scheme (FLS) actually shrunk net lending by £300 million in the first quarter of the year, with state-backed Lloyds and Royal Bank of Scotland among the worst offenders. However, the duo said the numbers were distorted by efforts to scale down their "non-core" loan books as part of their rehabilitation following the financial crisis. RBS said the quarter had actually been its strongest yet in terms of core lending to the "real economy." A reduction of £2.4 billion on its non-core and commercial property loans, needed to stabilise the bank, was behind the figure showing a £1.6bn fall in lending. A spokesman for the group said: "RBS has increased lending to the real economy by nearly £1bn in the first quarter of 2013, which includes a £600m increase in our business lending - our strongest performance since the scheme launched. We continue to punch above our weight in terms of lending to UK businesses. We're making more credit available to UK SMEs than any other bank. The official figures showed Lloyds Banking Group lent almost £1bn less during the quarter, despite having borrowed £3bn from the Bank of England and Treasury scheme. But a spokesman said that was also due to the efforts it was making to re-focus the business towards "fundamental parts of the economy." Lloyds plans to return to net lending growth before the end of the year. "We have been growing our SME lending by 4 per cent a year, on a net basis, and we have also pledged to increase our new lending to first time buyers to £6.5bn in 2013, compared to £6bn last year," the spokesman said. The Bank of England's figures showed Spanish-owned Santander made the biggest cut to net lending, credit shrinking £2.3bn as it continued its retreat from riskier parts of the mortgage market. Clydesdale Bank also shrank its loan book, down by £371m. The Nationwide Building Society and Barclays helped offset the declines elsewhere, as both ramped up lending by more than £1bn. Challengers Tesco Bank and Virgin Money also took advantage of the scheme, expanding their credit by £558m and £561m respectively. But critics said the scheme was not proving effective at stimulating the economy. John Longworth, director general of the British Chambers of Commerce, said: "The real test for FLS is whether it is able to get credit flowing to young and fast-growing businesses. Unfortunately many of these growth firms are still being left out in the cold when it comes to accessing finance, which prevents them from expanding, creating jobs and helping to drive a business-led recovery. Analyst Ian Gordon, at broker Investec, said the RBS figures were particularly disappointing as the bank had excess liquidity. "Unfortunately, today's data provides further evidence that it is currently unable to deploy this - with negative consequences for revenues, earnings and returns," he said. The Bank of England said net lending should pick up and turn "modestly positive" over the rest of the year. Paul Fisher, executive director for markets at the bank, said: "The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013."