Business Secretary Vince Cable will warn banks today that they will face greater government regulations if they don't lend more to cash-trapped businesses and slash bonuses.
Mr. Cable and others are of the view that shortage of credit for the private sector businesses will hurt economic recovery as is squeezing the public sector by announcing spending cuts worth more than six billion pounds in a bid to hack budget deficit.
The government also has plans to expand loan guarantee schemes. It could also extend lending targets imposed on the RBS and Lloyds after they were bailed out by the taxpayer at the peak of recession.
But, Mr. Cable will initially not use legislation to pressurize banks to increase the flow of lending. Instead, he will go through a voluntary agreement with the banks.
In an interview on Sunday, Mr. Cable said, "At the moment we are talking to them in an amicable way and we are monitoring them, but if this doesn't work, there are combinations of carrots and sticks that can be employed."
He will also tell lenders that they could easily increase the flow of credit by keeping their bonuses for this year at last year's levels.
Banks are claiming that four out of five applications for loans are being sanctioned, but businesses are arguing that several firms don't apply either due to high costs or they expect to be turned down.