The government is examining if Royal Bank of Scotland and Lloyds are hitting small and medium-sized firms with high loan rates.

A person familiar with the case said, “We don't want them to make uneconomic loans but our research suggests they may be pricing credit at unrealistic levels.”

Under the participation terms of the taxpayer-backed insurance scheme for toxic debts, the duo had made lending commitments to businesses plus homeowners totaling £39 billion per year.

In the first half of the year, Lloyds' corporate lending shrunk by £18 billion, while Royal Bank of Scotland’s corporate lending plunged by £7 billion.

On the other hand, Royal Bank of Scotland and Lloyds are defending their lending policies.

Both the lenders said they are on track to meet mortgage lending targets, but the corporate loan targets will be tougher as businesses are looking to clear debts rather than take on more borrowing.