The £80 billion scheme is designed to ease the flow of credit by offering discounted funds to banks, providing they pass on the benefits to businesses and households.
Although the first-quarter contraction of £300m marks an improvement on the £2.4bn decline seen in the final three months of 2012, today’s figures will raise further questions about the scheme’s ability to boost the real economy.
Stewart Baird, head of small business investor Stone Ventures, said: “From a business lending perspective, the FLS has been an absolute failure. Our discussions with smaller businesses suggest that the banks’ criteria remain extremely tough.”
The biggest decline during the first quarter was seen at Santander, where net lending shrank by £2.3bn. There were also contractions of £1.6bn and £983m respectively at state-backed lenders Royal Bank of Scotland and Lloyds Banking Group.
Clydesdale Bank saw its net lending fall by £371m, but Barclays and Nationwide grew their figures by more than £1bn.
The Bank of England said: “It will take time for the improvement in credit conditions experienced since the launch of the FLS to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process.
“Prior to the launch of the FLS in July 2012, Bank staff judged that UK bank lending was more likely to decline than increase over the subsequent 18 months. Net lending is expected to pick up and become modestly positive over the remainder of the year.”