Government may force banks to lend to firms

LONDON (Reuters) - Chancellor Alistair Darling is considering tougher laws to force banks to lend to small businesses which are struggling with the global credit crunch, newspapers reported on Friday.

The reports said Darling was looking at measures which could include capping interest rates on loans to small firms, while a leading Labour politician accused the banks of "navel gazing" and even suggested full-scale nationalisation as a last resort.

A spokesman for Prime Minister Gordon Brown said government wanted to see banks delivering on their commitments to lend.

"In circumstances such as these, you have to look at all options," the spokesman told reporters. "But, of course, we want to work constructively with the banks."

Darling will deliver his pre-budget report on Monday, which will include measures to stimulate the economy.

The Daily Telegraph and Daily Mail both reported that Darling is expected to introduce a new scheme to underwrite small business loans, but if banks fail to loosen their lending policy he would legislate to make them do so.

A Treasury spokesman declined comment.

John McFall, head of parliament's influential Treasury Committee, said major banks must start lending to small business or face increased public pressure for nationalisation.

There is growing anger at the apparent reluctance of banks to pass on cuts in official interest rates to mortgage holders or free up credit to small businesses -- particularly after several participated in a 37 billion pound government bailout scheme.