ROYAL Bank of Scotland has slashed lending to small and medium sized enterprises by around a quarter of a billion pounds under a key scheme in the latest quarter official figures have revealed.

The Bank of England found SMEs repaid taxpayer-owned RBS £266 million more than the bank lent to smaller firms under the Funding For Lending programme in the three months to June.

The figures will raise fresh concerns that Edinburgh-based RBS is not doing enough to support SMEs who were hit hard during the long economic downturn.

The Bank of England launched the Funding for Lending Scheme in 2012 to help kick start lending by providing banks with access to cheap money. It increased the scheme’s focus on business lending in 2014.

However, Royal Bank has reduced lending to SMEs under the scheme in all bar one of the last six quarters.

The bank has cut lending to SMEs by around £2bn in total over the 18 month period.

By contrast, Bank of Scotland owner Lloyds Banking Group increased lending to SMEs in all six quarters.

Lloyds lent £527m net of repayments in the latest quarter taking the total advanced in the 18 months to June 2015 to £2.2bn.

The Bank of England noted participants in the FLS scheme increased net lending to SMEs by £0.5bn in total in the latest quarter.

Aldermore, one of the new players aiming to win market share from big players, lent £122m to SMEs.

The Bank of England said: “The improvement in net lending to SMEs over the past few years reflects a loosening in credit conditions for SMEs over this period, and there is some evidence of further loosening in 2015 Q2.”

It said the improvement in credit conditions seen over the past few years in part reflected substantial falls in bank funding costs since the launch of the FLS scheme.

Against that backdrop, the fall in lending by RBS will lead to the bank coming under increasing scrutiny.

There may be fears lending to SMEs is being squeezed as part of the bank’s plans to shrink its balance sheet and cut costs.

Ross McEwan became chief executive in October 2013 with a brief to get RBS in shape to allow the Government to sell down the controlling stake in the bank it acquired after providing £45bn bail out funding in 2008 and 2009.

The Federation of Small Businesses in Scotland said the figures could heighten concern about the impact of cut backs at RBS.

Head of external affairs Colin Borland noted the bank has a programme of branch closures.

He said: “They are abandoning more and more towns and more and more locations. If you lose the local link businesses are less likely to go in and talk about things.”

Mr Borland said both RBS and Lloyds are dealing with the legacy of the problems they developed in the financial crisis of 2008 and preceding years, but added: “When you really only have two big players in a market if one of them is retrenching that has a disproportionate effect.”

Royal Bank is trying to reduce its exposure to markets like commercial property.

A spokesperson for the bank said it continues to play its part in the economic recovery, exceeding the £9bn target set for new SME lending in 2014 (by £1.3bn) and remaining the biggest lender to British business.

She added: “In 2014 we provided banking services to over 100,000 start-up businesses, six per cent more than in 2013.

"To give businesses the confidence to invest in growth we have been writing to thousands of customers outlining how much additional borrowing the bank is willing to lend their business. We have proactively contacted over 350,000 UK SME customers to offer over £12.5bn new lending.”

The Government raised £2bn by selling a 5.4 per cent stake in RBS at a loss last month, leaving the taxpayer owning 73 per cent of the shares.

George Osborne has reduced the holding the Government acquired in Lloyds Banking Group from around 25 per cent to less than 13 per cent by selling shares. It has recouped around £14.5 billion of the £20.5 billion spent bailing out the lender in 2008.

The turnaround appears to be more advanced at Lloyds than at RBS.

The FSB said lending conditions appear to be improving overall. While between 35 and 40 per cent of members say they can not obtain affordable credit more than 60 per cent reported having problems in 2012 and 2013.

Clydesdale Bank does not participate in the Funding for Lending scheme. Figures for the bank’s net lending to SMEs in the second quarter were not available.

Nationwide Building Society cut non-core commercial property lending by £279m in the second quarter.