Leading banks today insisted that they were increasing lending to small businesses, hours after the Government threatened to force banks to offer loans to companies.

David Dooks, statistics director for the British Bankers Association (BBA), insisted that banks were continuing to make finance available after the BBA announced that loans to small companies had grown by 10 per cent to £44.8 billion during the 12 months to September.

The group added that lending had increased by one billion in the third quarter of 2008, and that borrowing had increased by 4 per cent to £9.3 billion, with deposits up 3 per cent at £55 billion over the period.

Although the BBA was keen to push the increase in lending during the third quarter, it admitted that the pace of growth had slowed compared with the previous quarter and the same period last year.

"Slowing growth in deposits shows that small businesses are increasingly funding their activities out of cashflow, but a rise in lending in the third quarter ... shows banks continuing to make finance available," Mr Dooks said.

Alistair Darling, the Chancellor, is considering tough new laws to force banks to lend to small businesses, reeling from the economic slowdown and the effects of the banking crisis.

The Government has insisted that banks continue to lend to both individuals and businesses as part of its £37 billion bailout of the banking sector.

The banking sector is facing the beginnings of a potentially serious consumer backlash as it fails to pass on successive interest rate cuts to embattled borrowers and speculation mounts that it is turning off the tap for credit.

The banks came under further pressure today from the Treasury Select Committee, an influential cross-party group of MPs.

John McFall, the committee's chairman, said: “Despite having been pulled back from the brink, the banks appear reluctant to launch their sizeable recapitalisation lifeboat and start lending again to households and businesses.

"It would seem that they are instead navel-gazing and looking warily at each other instead of concentrating on their customers, many of whom are still in peril on a sea of uncertainty.”

Angela Knight, the BBA's chief executive, defended the banks. She told the BBC today: “It does make absolute sense that what a bank must do is assess that the business that it is lending to is a viable business.

"Most of the banks are getting proper arrangements in place to assist the small businesses through a difficult time.”

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts