The Government is struggling to raise £1 billion from banks to finance its much-delayed National Investment Corporation (NIC), a fund to help small businesses, and may have to contribute a large amount of taxpayers’ money to hit its target.

Officials are preparing for a final round of arm-twisting with banks in an attempt to reach an agreement on the scheme by the end of the month.

Senior financiers have been called to a meeting with officials from Lord Mandelson’s Business department next week in the hope that a plan can be thrashed out.

But there is a growing belief that the Government will fail to hit its target of £1 billion mainly from retail and investment banks operating in the UK.

The Government has been considering injecting public money into the fund and will almost certainly have to commit a larger sum than it intended, insiders believe. The fund may also have to be administered in a piecemeal way, making small amounts of credit available at any one time.

The NIC is intended to be like the Industrial and Commercial Finance Corporation, a body set up after the Second World War to help small businesses, which later evolved into 3i, the private equity firm.

The project ran into trouble when eight investment banks that had been asked to contribute £25 million each refused to co-operate when they learnt about the bonuses tax in the Pre-Budget Report (PBR).

Disagreements have also emerged over what form the NIC should take. Investment banks want the money to be put into their own funds which invest in the UK economy. In contrast, retail banks will hand over funds only if they are used to directly extend loans to small business.

Royal Bank of Scotland, which is 84 per cent owned by the taxpayer, and Lloyds, in which the taxpayer has a 43 per cent stake, have each agreed to contribute £100 million to the fund.

Barclays and HSBC have raised objections but are expected to stump up about £25 million each. Santander, the Spanish banking group, which owns Abbey and Alliance & Leicester in the UK, is also likely to contribute. Standard Chartered, which does no lending in the UK, will not.

The Government wanted building societies to back the fund, but the sector has rebuffed requests on the grounds that many mutuals are struggling and need to conserve their cash.

Meanwhile, banks are preparing to take the hit from the Government’s bonus tax so that they can still pay most employees what they were expecting for 2009.

Although UK and foreign banks based in London are furious about the 50 per cent levy, most are planning to pay the tax rather than limit bonuses.

Plans are still being finalised, but insiders believe that investment banks operating in London will pay the tax from their global bonus pool.

This will spread the cost and may mean a small reduction in payments to employees. But banks’ shareholders will bear the brunt of the cost.

Josef Ackermann, chief executive of Deutsche Bank, has pledged to spread the cost across the whole bank.

“We will clearly globalise it. It would be unfair to treat the UK bankers differently,” Mr Ackermann said recently.

The tax will be levied on all UK and foreign banks operating in London on bonuses paid from December 9, 2009 to April 5, 2010.The Government has reserved the right to extend the period if it feels banks are delaying bonuses in order to avoid the tax.

Analysts believe that it will raise between £3 billion and £5 billion for the Treasury, much more than the £550 million the Government initially estimated that it would receive.

Times Recommends

• Tories’ green bank to revolutionise power policy
• UK car industry receives £2.6bn injection
• Pru chief turns down seat on board of bank