Lending to cash-strapped small businesses is falling at the fastest rate since records began, according to a Bank of England report released on Monday.
Experts warned it is further evidence that Project Merlin, the Government's attempt to stimulate banks to increase credit for businesses, is just ‘dangerous window dressing'.
Figures released by the Bank showed lending to firms of all sizes fell by around £4 billion (Dh24.09 billion) between March and May.
Lending to small firms was down by 4.2 per cent in May compared with the same month last year — the worst annual percentage fall ever.
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It compares with a year-on-year increase in lending of 15.89 per cent in the 12 months to May 2008, shortly before the banking crisis struck.
And those small firms which do manage to secure money from their bank are being charged soaring rates of interest, the Trends in Lending report found.
Under the terms of the Project Merlin deal struck with the Government — which was announced in February — the country's biggest banks pledged to lend £190 billion to firms this year, up from £179 billion in 2010. This must include at least £76 billion to small and medium-sized firms.
Lord Oakeshott, the former Liberal Democrat Treasury spokesman who resigned over the deal, said: "What more proof does the Government need that Project Merlin is dangerous window dressing for the banks' failure to lend?
"This is like a horror film where you can't believe that each reel is worse than the last one.
"No wonder Britain's economic recovery is juddering to a halt when the banks won't lend to businesses who want to grow output and jobs."
John Walker, national chairman of the Federation of Small Businesses, said his organisation was concerned that "no amount of lending targets will improve the situation".
Research, conducted by Labour's shadow small business minister Chuka Umunna, has revealed the personal finance options that many entrepreneurs are having to rely on as they fail to secure credit for their businesses.