Belluf

Project Merlin

The Item Club said that overall bank lending rose by 4.3% last year. After contracting this year it expects lending will rise by just 0.9% in 2013.

The contraction in corporate lending is expected to hit the the construction and real estate sectors and smaller companies in particular.

"Funding for small and medium-sized enterprises is likely to be particularly difficult to obtain as banks seek to reduce credit risk," said Neil Blake, senior economic adviser at the Item Club