PART-nationalised Royal Bank of Scotland and Lloyds Banking Group have reduced their net lending under the Bank of England's Funding for Lending (FLS) scheme by £2.6 billion in the first three months of 2013.

The figures were released as Bank of England deputy governor Andrew Bailey insisted Edinburgh-based RBS and Lloyds, owner of Bank of Scotland, had not been "let off the hook" by regulators just because they do not have to issue new shares to shore up their capital positions. Mr Bailey, who is also chief executive of the Prudential Regulation Authority, insisted the two banks had overhauled their business plans and remained under close scrutiny.

Net lending under the Funding for Lending (FLS) scheme fell by £300 million in the first quarter of 2013, according to figures published yesterday.

RBS, which is 81% state-owned, said customers repaid it £1.6bn more than it lent in the first quarter.

Lloyds, 29% owned by the taxpayer, reduced net lending by £983 million.

Net lending by Santander was also down by £2.2bn in the quarter, despite its stated expansion ambitions for Scotland and elsewhere.

Mr Bailey said the result "needs to be judged against a worse outlook for lending a year ago". He insisted in a speech to the Society of Business Economists that the Bank's drive to get banks to increase their capital cushion will not hit lending.

He criticised comments that the failure of the Bank to insist on RBS and Lloyds raising new equity was letting them off the hook. "I have to tell you that is not true, it was always envisaged both banks would achieve their capital enhancements by restructuring their balance sheets without reducing their lending to the UK economy," he said. "These banks have agreed to do what we have asked and we will hold them to that," he added.

RBS, under chief executive Stephen Hester, has pledged to float around one-quarter of the shares in its US bank Citizens to meet regulators' demands and further trim its investment bank.

Lloyds, headed by ex-Santander UK chief Antonio Horta-Osorio, recently sold a large parcel of US mortgage bonds to boost its capital.

Under the FLS, which aims to incentivise banks to lend, the Bank of England has handed out £16.5bn in funding since June 30 last year. Over this period net lending has fallen by £1.8bn. Net lending by RBS and Lloyds is down by £10.6bn.

"The picture of flat lending growth overall is broadly as expected at this stage, reflecting reductions in some legacy portfolios being roughly offset in aggregate by expanding new lending," said Paul Fisher, the Bank of England's executive director for markets.

"The plans of the FLS participants suggest net lending volumes will pick up gradually through the remainder of 2013," he added.

RBS said its figures were affected by a planned £2.4bn reduction in its lending on commercial property and other areas it deems non-core. The bank said it estimates it increased lending to the real economy by nearly £1bn in the first quarter of 2013.

An RBS spokesman said: "We continue to punch above our weight in terms of lending to UK businesses."

A Lloyds spokesman said: "The acid test for the Funding for Lending Scheme's success is whether we are lending to SMEs (small and medium-sized enterprises) and first-time buyers. We have been growing our SME lending by 4% a year, on a net basis, and we have also pledged to increase our new lending to first time buyers to £6.5bn in 2013 compared to £6bn last year."

The decline in net lending was because it was running down non-core parts of is business, the spokesman said.

British Bankers' Association chief executive Anthony Browne said: "Banks are actively using the Funding for Lending Scheme to lower the cost of funding for customers which means businesses wanting to borrow are currently benefiting from some of the lowest rates in history."