HIGH Street banks cut lending to non-financial businesses by £600 million in August, but the number of mortgages approved for home-buyers hit a near five year high, in a further sign the housing market is recovering.

Figures from the British Bankers Association show big lenders took huge amounts of lending out of the economy again last month as repayments far outweighed new lending.

The fall in net lending was lower than the £2.6 billion recorded in July.

However, with banks cutting lending by a monthly average of £1.6bn since March, the BBA figures may raise fresh concerns about the effectiveness of official efforts to encourage banks to increase lending. These followed persistent claims companies were being denied affordable credit.

In April the Bank of England extended the Funding for Lending Scheme that makes cheap money available to lenders to January 2015. It "heavily skewed" the incentives to boost net lending towards small and medium sized enterprises.

The BBA said lending to SMEs was stable. It reckoned the latest reduction in net lending was driven by large firms using alternative funding sources, such as bond markets. However, the Federation of Small Businesses in Scotland said the reforms had not yet had a significant impact in the country yet: "Things are beginning to ease but it's still tight," FSB's head of external affairs in Scotland, Colin Borland, said. "Far too many, when they go into the bank, are not getting what they want."

Mr Borland renewed calls for the Government to try to boost competition in business banking markets. This could involve encouraging new entrants.

"We need a genuine choice of smaller business banking products which will result in existing providers competing harder for business," said Mr Borland.

Meanwhile, the BBA said the number of mortgages approved for home purchases increased to a 56-month high of 38,228 in August, from 37,428 in July.

"The stronger BBA mortgage approvals figures continue the stream of recent data and surveys indicating that housing market activity is now really stepping up a gear," said Howard Archer, chief UK economist at IHS Global Insight. He said the market was being supported by "markedly strengthening" consumer confidence and elevated employment.

Mr Archer believes the Funding for Lending Scheme and the Government's Help to Buy initiative were encouraging lenders to offer mortgages. He added: "Although it is a mounting risk, we are some way off an overall new housing bubble developing with activity still relatively limited."