HAS the UK Government's Funding for Lending Scheme (FLS) failed?

Could it even end up causing more harm than good?

Figures from the Bank of England yesterday showed that, though participating banks can borrow money from the central bank at just 0.75%, net lending fell by £300m in the first quarter of 2013. What is worse, while Barclays and Nationwide increased their loan books over this period, the part-nationalised RBS and Lloyds Banking Group, which includes Bank of Scotland, and on which Scottish businesses are disproportionately dependent, reduced net lending by some £2.6bn. Simultaneously the Clydesdale Bank is calling in many small business loans and the Co-op has decided recently not to take on any new business customers.

There are different ways of looking at the figures. Part of the story is that the banks are attempting to reduce their exposure to the struggling commercial property market and other non-core areas. Hence the talk yesterday about reducing "legacy portfolios", while both RBS and Lloyds say their new lending to businesses has increased.

Also, all things are relative. Without FLS these figures could have been a lot worse. In addition, there are suggestions that lending will increase later this year.

Even so, the best that can be said nearly a year after the scheme was launched is that it has done more to kickstart the mortgage market than stimulate the economy through business lending. Some Cassandras even predict that the main achievement of FLS will be to create a new house price bubble, leaving a generation of young people unable to get on to the housing ladder and producing widening inequality.

Meanwhile SMEs (small and medium-sized enterprises) continue to claim that banks will not lend to them on decent terms. Even when interest rates are modest, the pain is piled on with charges, fees and unreasonably harsh break clauses. "The real test for FLS is whether it is able to get credit flowing to young and fast-growing businesses," said John Longworth, director general of the British Chambers of Commerce.

In fairness, British banks have never been a normal source of funding for new businesses. In the jargon, they rely on "the three fs" (friends, fools and family), though countries like Germany have more of a market for small business funding outwith banks. Another issue is that established SMEs with sound business plans are still struggling for funding.

The real problem is that banks are caught in opposing currents. One part of the Bank of England wants them to lend while another part wants them to bolster their balance sheets. Meanwhile the Treasury wants the part-nationalised banks fattened up for sale. Little wonder that they do not know which way to turn. And the net result is that a fragile recovery is being hampered by the very sector that caused the downturn. Small businesses are the lifeblood of the economy. More must be done to help them.