PART-nationalised Royal Bank of Scotland has appointed former Bank of England deputy governor Sir Andrew Large to head a review into its small business lending practices.

Meanwhile, the Edinburgh-based institution has also revealed it is to reduce the workforce at its Ulster Bank subsidiary by 1800 to 4000.

RBS, 81% owned by the taxpayer, is taking action on lending after claims by many small businesses that they cannot obtain loans while the bank insists it is seeing muted demand for credit.

Sir Andrew said: "There is a disconnect between what the bank says it is doing on lending, and what many businesses say they experience on the ground.

"That is why we have been asked to conduct an independent review to establish what is going on, and what steps can be taken. The business community needs to have confidence that deserving firms can get the support they need."

In August 2012 the Bank of England launched the Funding for Lending Scheme (FLS) which directs cheaper financing towards banks increasing lending in an effort to boost the supply of loans.

RBS said it had lent £345m to more than 1200 Scottish SMEs (small and medium-sized enterprises) under the FLS but the latest figures from the scheme for the first quarter of 2013 showed that UK-wide it had cut net lending.

Sir Andrew will work with management consultancy Oliver Wyman, on a review of the small business lending standards and practices used by RBS and NatWest, the brand it uses on the high street south of the Border.

He will seek to identify measures the bank can take to increase support to SMEs.

Colin Borland, head of external affairs at the Federation of Small Businesses in Scotland, said: "We have to get a bit of transparency into the system.

"There is a recurring theme whereby the people who are in financial institutions think the way they make decisions is logical and reasonable.

"And the people making applications think they are robust and viable. There is obviously a mis-communication between the two."

He said the FSB would encourage members to participate in the inquiry.

Chris Sullivan, chief executive of UK corporate banking at RBS, said: "If there are loans that we could and should be making, but are not, then that will change. If there are things we can do better, we will."

Sir Andrew and Oliver Wyman staff will be given access to individuals at the bank as well as data and reports, RBS said.

Customers, small business groups, regulators and the Government will be consulted and the recommendations published this autumn.

Graham Galloway, managing director of commercial banking for RBS in Scotland said: "We will take whatever comes out of the review as an opportunity to improve how we help our SME customers."

Adam Marshall, director of policy at the British Chambers of Commerce, said: "We would hope that other major lenders follow RBS's lead, and shine a light on their own business lending practices."

Lending has been a point of conflict between banks and the Government, with Barclays warning on Friday it might have to cut lending if it is forced to act quickly to meet new regulatory targets. But former Barclays chief executive Martin Taylor, now a member of the Bank of England's Financial Policy Committee, dismissed "squawking" by banks.

"New lending to solvent businesses in the early stages of a recovery is the best kind of business to do," he said.

Meanwhile, RBS told investors it planned to cut the number of Ulster Bank branches it operates from 214 to between 175 and 185 by the end of 2014.

Job numbers at the institution which operates on both sides of the Irish border will fall from 5800 to between 4000 and 4500.

A spokesman for Ulster Bank said: "The remaining decrease in headcount should be met through natural attrition over the course of the strategic plan."

RBS has cut 41,000 jobs since launching its turnaround plan in early 2009.