by business editor Trevor Sturgess

Banks bailed out by the taxpayer are coming under increasing pressure to boost lending and lower the cost to borrowers.

Shortly after the latest figures showed the British economiy contracting by a further 0.8 per cent, Chancellor of the Exchequer Alistair Darling is meeting bank chiefs in an attempt to get them to loosen their purse-strings and give firms a better deal, especially in view of the fall in the Libor rate at which banks lend to each other.

KPMG chief economist Andrew Smith said bank lending growth had "all but ground to a halt" as the UK recession - the economy shrank by a further 0.8 per cent in the three months to June - was deeper and more serious than previously hoped.

The Federation of Small Businesses (FSB) claims that members are going to the wall because of the reluctance to lend.

Debasish Sen, chairman of the FSB’s North Kent branch, said the picture across Kent and Medway was much the same as elsewhere. Surveys suggest that local firms hit by cashflow problems are finding it hard to get the finance they need to help them weather the recession.

But banks deny they are doing anything wrong. Kent banking sources suggest that they are being criticised for being understandably cautious.

They claim that they have to be careful in recession because some struggling businesses will find it hard to repay the loans. They argue that in some cases, there is no point "throwing good money after bad."

Angela Knight, chief executive of the British Bankers Association, defended members. "Banks continue to be the major source of business finance and are increasing their support for small businesses," she said.

"Banks lend when and where borrowers are likely to be able to repay their debts. Commercial customers have to demonstrate loans can be repaid and banks will only be able to lend where businesses have enough paying customers coming through the door to finance repayments.

"More people default in recessions and banks also take longer to get their money back as they help customers by rescheduling repayments. "

She added: "Banks are paying relatively more for their money as a result of both competition for savings and scarce and expensive wholesale funding."