Banks are drawing up secret black-lists to ban businesses from overnight borrowing as the credit crunch moves into a damaging new phase, The Times has learnt.

The diminished trust between banks is spreading into the wider economy as bankers lose faith in customers' ability to repay these unsecured loans.

Hundreds of clients have been included in lists being drafted in the City of London. Their identities are confidential but are understood to include international trading and commodities companies that supply the small-to-medium-sized business sector.

A well-placed City source said that several banks were compiling blacklists to protect themselves from the growing risks of defaults and bankruptcies. Some banks are slashing lending periods for companies still able to access short-term funds to a maximum of three months.

The slump in lending by banks to business can be seen in Bank of England figures published last week showing a sudden fall since June. Vincent Cable, the Liberal Democrats' Treasury spokesman, said that the squeeze on overnight lending indicated that banks were failing to pass on Gordon Brown's £500 billion bailout of the banking sector. “There is a very serious problem on that score,” he told The Times. “There is a clear conflict of interest between the banks acting in their narrow short-term self-interest and the wider interest of the taxpayer.

“The Government appears to have accepted at face value assurances given by the bankers related to lending and bonuses which the banks are treating with complete contempt.”

Banks are already refusing to provide overdrafts to cover emergencies, such as a looming payday or dealing with a bad debtor, according to Henry Ejdelbaum, of ASC, a financial consultancy to small businesses. “If you have got problems, you can't go to the bank any more and say: ‘Can you extend my overdraft because a guy didn't pay me?' That's gone,” he said. “People are having to put their own cash into their business or remortgage their house or go to family. We've seen everything.”

He described how: one client's overdraft had gone up from 7 per cent to 12 per cent without notice; a garage business had its overdraft halved from £100,000 to £50,000; a client seeking an overdraft was asked for 8 per cent over the Bank base rate; a client who needed funds to construct a mezzanine floor went to his bank to seek an extension to his overdraft but was offered an expensive rate “to signal to the client that the bank does not really want to do it”.

Entrepreneurs are finding it harder to get bank loans, Lucy Findlay, who heads the CBI enterprise group, said. “The general message that we're getting from members is, yes, raising finances has become more difficult,” Ms Findlay said.

Smaller companies can become reliant on overnight banking and the weaker ones will find that life will get very difficult, according to John Grout, policy and technical director at the Association for Corporate Treasurers. “In the really small sector, companies may get in the habit of using uncommitted facilities to fund overnight [and sometimes longer] if they are getting to the limit of their overdrafts. This depends on the goodwill of their banks. In straitened times, banks will price up for this and may be reluctant to agree at all. It is a risky practice for the borrower.”

Some businesses will be effectively blacklisted and unable to do much about it. A source at a leading British bank said: “Banks have got lists of counterparties who they may wish to be more careful with on extending overnight money or being involved [as] a counterparty to them.”

Another banking source said: “Very few people are aware of this blacklisting so far. A number of banks are doing it. The businesses on these lists are already very precarious and this will make things harder.”

It is understood that banks would not inform companies that they have been blacklisted. The first they will know is when they are told they cannot borrow the money. And they are unlikely to ring anyone to complain, in case a run on their company begins.

Small-business blues
Gráinne Gilmore

­ Small and medium-sized manufacturers are cutting jobs for the first time in 18 months, according to the CBI. The employers' group's quarterly report on small and medium-sized enterprises (SMEs) shows that nearly 30per cent cut their workforce in the three months to October, while only 17per cent recruited new workers

­ The outlook for workers remains bleak, with 27 per cent of companies saying that they will reduce their workforce in the next three months as they expect orders to continue to slump

­ The number of people claiming jobless benefits jumped by 31,800 to 939,000 in September and figures out this week are expected to show a further rise to 977,000 last month, raising the chances that the total number could exceed one million by Christmas

­ Russel Griggs, chairman of the CBI's SME Council, said that the sharp deterioration in the economy combined with difficulties in obtaining credit as banks conserve their cash had taken a heavy toll

­ Banks came under fire last week for dragging their heels over passing on the Bank of England's 1.5 per cent rate cut to borrowers, but the banks argued that their cost of funding remained high

­ Nearly a quarter of SMEs said that output had fallen rather than risen in the three months to October. It may fall farther: 57 per cent more companies said that they were pessimistic rather than hopeful about business in coming months

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