LABOUR last night branded the Coalition's Project Merlin agreement with banks "a total failure" after figures showed the total net lending by Britain's top five institutions had fallen in every quarter of last year.

The deal with the lenders obliged them to meet fixed lending targets.

However, the Bank of England said combined net lending from the big five – the Royal Bank of Scotland, Lloyds Banking Group, Santander, Barclays and HSBC – fell last year. This included a 3% drop in the final quarter.

They missed gross lending targets for small businesses in 2011 by more than £1 billion, lending £75bn, yet beat the target for all businesses by some £25bn, with a total of £215bn.

The 82% taxpayer-owned RBS was the culprit for the shortfall in small business lending as the other four lenders con-firmed they had all beaten their targets.

Chris Leslie, the Shadow Treasury Minister, said: "After a year, it's now clear George Osborne's backroom deal with the banks has been a total failure.

"It's been a good deal for the banks, but a bad deal for small businesses and taxpayers.

"Last year, David Cameron boasted he was going to get £10bn more lending for small businesses but as the Bank of England is tellingly, pointing out, net lending to businesses has fallen by almost £10bn in the last year.

David Hillman, of the anti-poverty Robin Hood Tax campaign, said: "The Prime Minister pledged if Project Merlin targets were not reached, then the Government would consider new taxes on the banks.

"Now is the time to honour that commitment."

A Downing Street spokesman said the lending figures reflected how Britain was "facing a challenging time in our economy and the fact we have been through a very severe financial crisis has had a significant effect on the banking sector and the flow of credit, not just in this country by around the world".

The British Bankers' Association said the overall lending figure to all businesses highlighted the banks' commitment to help them.

It added that the demand for credit from small businesses had fallen in three out of the last four quarters.

Stephen Hester, RBS chief executive, defended the Scottish bank, saying its total lending was close to that of all the other banks put together.

He said: "There is no bank in this country coming close to punching above their weight in the way we are. Forget Project Merlin and how it's defined – that's damned impressive. People have lost sight of that."

A spokesman for the Project Merlin banks said: "The banks' efforts to encourage customers to come forward with borrowing proposals are set against this overall challenging economic environment.

"The business demand for credit remains weak."

George Osborne is likely to face questions over whether any penalties will be put in place for the banks' failure to hit the small business lending targets.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said small firms continued to be frustrated by the cost and terms around lending.

Meanwhile, Treasury Chief Secretary Danny Alexander and Cabinet Office Minister Francis Maude have written to all Government departments asking them to examine their reward structures after public anger over the near £1 million initially awarded to Mr Hester.

Deputy Prime Minister Nick Clegg said: "What people really find unacceptable – and I do too – is the idea of huge rewards for failure or for just basically doing a normal job."

David Cameron's spokesman described the review as "perfectly sensible".