A flagship scheme to encourage small and medium sized enterprises to switch from Royal Bank of Scotland group to other lenders has been extended amid the challenges posed for firms by the coronavirus crisis.

The deadline for applying to change banks under the Incentivised Switching Scheme (ISS) has been moved from August to the end of February next year while an additional 200,000 RBS group customers have become eligible.

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The scheme offers payments of up to £50,000 to qualifying firms that switch from RBS group to one of 10 approved lenders. The list includes Virgin Money-owned Clydesdale Bank and Edinburgh-based Hampden & Co.

The changes announced yesterday raise fresh questions about a scheme that was meant to provide a big boost to competition in the SME banking market.

The programme was running well behind target before the coronavirus outbreak.

The organisation that runs the scheme, Banking Competition Remedies, admitted yesterday that switching banks is unlikely to be a priority for SMEs amid the uncertainty caused by the coronavirus.

The decision to extend the deadline will spark concern that the shake up in the small business banking market some thought was badly needed may not happen on the scale hoped for.

It comes weeks after Nationwide building society announced that it had dropped plans to enter the business banking market amid the fallout from the coronavirus.

The switching scheme forms part of the Alternative Remedies Programme agreed in 2017 to help Royal Bank comply with terms imposed by European regulators for agreeing to the £45 billion taxpayer bailout the group received amid the global financial crisis in 2008.

It was expected the scheme would encourage 120,000 SMEs to switch from taxpayer-owned Royal Bank by the original deadline of the end of August.

The take-up had fallen so far below expectations that the size of the dowries payable to some sizes of firms that switch were increased in March.

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Banking Competition Remedies said yesterday that only around 41,000 SMEs have switched or are in the process of doing so.

The organisation insisted the scheme had already made a difference in doubling the SME switching rate but progress had inevitably been impacted since mid-March by the Covid-19 coronavirus.

“The earlier run-up to Brexit and the associated economic and social uncertainties ahead are also factors,” added BCR.

The lead director on ISS Brendan Pellow said the changes announced offered the best opportunity to sustain momentum towards the ambitious targets put in place at the outset of the scheme, in what was a very different economic environment.

Mr Pellow noted: “Switching is understandably not top of SMEs’ ‘must do’ list at the moment.”

Taxpayer -owned Royal Bank said the announcement of the changes provided greater certainty.

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The bank, which is led by Alison Rose, said it would write to a diverse cross section of 200,000 businesses with annual turnover of up to £1m to let them know they are now eligible.

Firms of that size could qualify for dowries worth up to £3,000.

It may have to pay up to a further £50m if the switching scheme target is not met.RBS agreed to contribute an initial £225m in respect of switching under the alternative remedies programme (ARP). The group had to come up with alternatives after failing in its attempt to meet the original condition, which was to offload its Williams & Glyn operation.

The ARP also includes a £425m scheme to build the capacity of other banks.

Banking Competition Remedies said firms that want to qualify for switching dowries must apply to their new bank before the end of February, so transfers can be completed by the end of June 2021.

It noted that under the terms of the Alternative Remedies Programme no further extension to the end date of the switching scheme would be possible.

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In January, Clydesdale Bank owner Virgin Money said:“The overall pace of both asset and liability switching through the scheme remains slower than expected, reflecting weaker switching demand from RBS customers.”