Government and banks pledge lending help

By Rhys Jones and Steve Slater

LONDON (Reuters) - The government and major banks pledged to improve lending to small businesses and ease strains on home owners on Wednesday as pressure intensified on lenders to free up credit in the face of recession.

Prime Minister Gordon Brown unveiled a scheme to allow borrowers experiencing a temporary loss of income due to the downturn to defer mortgage interest payments for up to two years.

"We will make this possible by guaranteeing lenders against the risk of loss from those deferred interest payments," he said.

Brown also set out plans to make a voluntary code of bank practice mandatory, which could lead to fines being imposed on banks who fail to treat customers fairly or hold back lending.

Bank of England Governor Mervyn King warned last week banks must resume lending if the country is to avoid a recession becoming a slump, while the government has said banks -- many of whom have received major injections of public money -- must do more.

Lloyds TSB promised to pass on interest rate cuts to small firms and said if interest rates are cut on Thursday, as expected, it will pass on the change in full to mortgage customers.

Its merger partner HBOS also said it will provide more attractive loans to small and medium-sized enterprises (SMEs) and state-owned Northern Rock relaxed its home repossession policy.

Brown said eight banks had signed up to the plan to allow cash-strapped families to defer "a proportion of" their mortgage interest payments, which could provide help to thousands set to lose their jobs as the economy sinks into recession.