LENDING to small and medium-sized businesses in the UK tumbled by a net £660 million in April, the steepest monthly fall since December last year, figures from the Bank of England reveal.

And lending by banks and building societies to UK non-financial businesses as a whole dropped by a net £3 billion, also the steepest drop since last December, yesterday's figures show.

In the wake of the disappointing figures, the Federation of Small Businesses in Scotland hammered home its view that there was a need for more competition in the market for small business lending north of the Border.

Referring to Bank of Scotland owner Lloyds Banking Group and Royal Bank of Scotland, FSB Scotland spokesman Stuart Mackinnon said: "We desperately need more banks and institutions fighting for our members and the wider small business community's custom, especially in Scotland where two banks dominate the small business lending market-place."

News of the latest fall in lending underlines the challenges facing the UK economy, which is struggling to mount any meaningful recovery five years after the onset of the Great Recession of 2008/09.

It also signals that the UK Government and Bank of England's flagship Funding for Lending Scheme (FLS), which is aimed at boosting lending by banks to households and businesses, is failing to have a significant impact. The scope of the scheme, which was launched last summer, was extended recently in an attempt to kick-start lending.

Mr Mackinnon said: "These new figures show the UK Government's schemes to get more money out of the banks and into the rest of the economy still don't seem to be working."

Highlighting continuing debate between banks and businesses about whether falls in lending are principally down to supply or demand, Mr Mackinnon added: "The argument between banks and business about whether falling levels of lending are a symptom or a cause of low-growth continues.

"However, falling levels of lending to both small businesses and larger firms suggest that there's still a lot of work to be done to reconnect big finance with the enterprise community."

April's £660m net drop in lending by banks and building societies to small and medium-sized enterprises (SMEs), which takes into account new advances and repayments, followed a fall of £115m in March. In February, there had been a £141m net rise in lending to SMEs, an increase which followed seven consecutive months of decline.

The £660m net fall in lending to SMEs in April was greater than the average monthly drop of about £500m over the previous six months.

The £3bn net drop in lending to non-financial businesses as a whole in April was much steeper than the average fall of £1.3bn over the previous six months.

Mr Mackinnon said: "Anecdotes suggest that some sectors and businesses without significant assets struggle the most to get hold of favourable finance packages.

"Further, the Bank of England's data shows that the smaller the business, the more you're likely to pay for credit and finance."

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The further, and markedly-deeper, drop in net lending to non-financial companies in April adds to evidence that the FLS has so far failed to have any material impact in lifting bank lending to companies. It is important for UK growth hopes that all companies who are in decent shape and who do want to borrow can do so, and at a non-punishing interest rate."

Outstanding lending to non-financial businesses and SMEs stood at £470bn and £174bn respectively in April.