Bank of England governor Mervyn King yesterday attacked the banks for destroying small firms by starving them of cash.

He told MPs it was 'heartbreaking' to see so many businesses going under because lenders refused to supply them with the essential funds they need to function.

Small businesses are being repeatedly refused funds from the very banks that have been propped up by their taxes.

Mr King was particularly critical of modern banking practices, where face-to-face contact has been replaced with computer generated mail-shots.

Steven Jackson of Beatmydebt.com agrees with Mr King's comments. "Banks seem to have lost the personal touch they once had. It is not very rare for a small business owner to have any kind of personal relationship with their bank manager".

"Banks are making lending decisions based on criteria set in the board room and not at the local branch where the local knowledge should exist. It seems to me that the the individual circumstances and forecasts of the individual business count for very little. We need our banks to get more personal, work closer with and support their local businesses" Jackson added.

Banks obsessed with rebuilding own balance sheets 

Despite billions of pounds being pumped into the economy, up to 500 small businesses a week are being forced to the wall by banks which are obsessed with rebuilding their balance sheets.

Mr King said he leaves his office in London every month to visit bosses nationwide and hears the same horror stories.

Many have had a business account with the same bank for '60, 80 years', Mr King told the Treasury Select Committee yesterday. But the banks often show no loyalty or understanding about the impact of their decisions, such as rejecting a loan application or raising its charges. 

Mr King said: 'Out of the blue comes a letter churned out by a computer which says: "The terms of our relationship have changed." And they [ the bosses] simply do not think that is a sensible and fair way to operate the relationship.'

During the downturn banks have insisted that lending to firms is falling because they
are not asking for money. Mr King rubbished this excuse, saying: 'For the banks to say there is no demand for credit is not an adequate response.'

Lending to businesses has plunged

He told MPs of his respect for the huge amount of work required to set up and build a firm  -  a job made far more difficult by the banks' behaviour.

He said: 'You used to have a bank manager who understood your business and knew that you were trustworthy, but these days it's nameless officials in Hong Kong.'

Tory MP Andrew Tyrie, chairman of the committee, said he and Mr King were 'singing from the same hymn sheet'. He said: 'Hundreds of MPs, including me, have been approached with appalling stories of healthy business mucked around by banks, either by withdrawing a finance or with massive increases in their charges.'

Between June 2009 and May 2010, net lending to UK businesses plunged by £46billion. The monthly figure has been positive in just two of the last 12 months.

One in three businesses has been rejected by its bank when asking for a loan or an overdraft, according to the Institute of Directors.

Solution is new competition

Mr King said the key solution is for new banks to come into Britain, and stir up more competition in the industry.

He said new banks would 'pose a competitive threat to these [existing] banks. And if people want to jeopardise client relationships, well, they will just lose business'.

Today, Metro Bank becomes the first new high street bank to open for more than a century. It will offer business bank accounts, although it will initially have just one branch in London but hopes to expand to 200 in the next ten years.

Mr King said it is time for the banks to pump less money into bonuses for their workers and dividends for their shareholders, and more cash into businesses. The warning comes days after Business Secretary Vince Cable threatened banks with a tax on their gross profits if they do not curb bonuses and dividends.

The British Bankers Association insisted that one of the key priorities for banks is to support 'businesses through the global downturn'.

A spokesman said: 'We agree with the Governor's view that more competition in the banking sector will mean more choice for customers, and alternative sources of funding for businesses need to be explored.'