Alistair Darling, the Chancellor, and Lord Mandelson, the Business Secretary, will meet chief executives of Britain's leading banks on Wednesday to urge them to increase small business lending to last year's levels of £53 billion.

The move puts the plight of small and medium sized firms at the centre of the Government's economic recovery plan as fears grow for thousands of jobs. Both Labour and the Conservatives are battling to claim the title of saviour of Britain's 4.5 million small businesses which employ almost 14 million people.

Lord Mandelson told MPs on the Commons Business Select Committee that those banks that are being recapitalised by the Government are obliged to lend to small businesses at last year's level, although he appreciated that they had to take risk into account and that some businesses posed greater risks now than 12 months ago.

The Business Secretary said that he was “very concerned from what I heard last week from representatives of small businesses” in terms of access to finance and higher charges being imposed by banks. He said some small businesses were being hit by a “double whammy” of having existing loan arrangements rewritten and being charged more for the new finance.

The Government on Tuesday set out a package of help for small businesses including £350 million towards training and skills and faster payments across a wide range of public bodies. Ministers had already announced that government departments would pay their small suppliers within ten days but yesterday this was extended to health authorities and local councils.

Small companies have complained that their customers, especially large companies, were delaying payments, jeopardising their cashflow. Lord Mandelson said that ministers wanted the “active marketing of competitively priced lending to small businesses at a level at least equivalent to 2007”. He added that “the Government will monitor how the recapitalised banks are delivering their commitments to small businesses.”

Lord Mandelson's comments follow a flurry of political activity directed towards smaller businesses after warnings that credit for the sector is drying up. The Conservatives this week proposed a one penny cut in national insurance contributions and a VAT holiday. The Business Secretary said that he wanted “some care and sensitivity from the Revenue authorities in dealing with business”.

John Cridland, Deputy Director-General of the CBI said: “Small businesses will be glad that the Government is taking action to help them through these exceptional economic times.” David Frost, director-general of the British Chambers of Commerce, said: “The economic slowdown is emphasising the UK's skills shortages. Making more funds available to improve staff skills will benefit small firms.”

The Business Secretary also raised doubts over the future of Royal Mail. He said indications from the independent Hooper review into the postal market “painted a rather stark picture” partly because of migration to electronic mail. He said Royal Mail's pension deficit was “ballooning”. He added that although he had a strong commitment to Royal Mail, ministers “need to see it is becoming efficient, modernised and viable”.

Lord Mandelson indicated that the Hooper review could be widened, potentially plunging Royal Mail into prolonged uncertainty until recommendations can be made to the Government.

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