UPDATE 7-UK gov't, banks pledge help for SMEs, homeowners

By Rhys Jones and Steve Slater LONDON, Dec 3 (Reuters) - Britain's 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 UK 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 UK 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. A source told Reuters the new scheme would cover payments on mortgages worth up to 400,000 pounds. Brown's spokesman said the proportion covered by the scheme "could be up to 100 percent" depending on borrowers' circumstances. TIGHTER TERMS Politicians and small business lobby groups have blamed banks for cutting credit and some companies in a survey of UK services firms on Wednesday said lenders had tightened terms over the past month as the sector shrank. Criticism of the industry has stepped up since the government unveiled a 37 billion pound recapitalisation programme in October, under which banks pledged to do more to help homeowners and small businesses. "The banks are caught between the internal pressures to reduce lending given the deteriorating economy and tightening credit models, and the government's stated need to keep lending at previous levels," said Sandy Chen, analyst at brokerage Panmure. "The risk is if they meet the government's demands by increasing loans it might lead to a bigger bad debt problem a couple of months down the line," Chen said. Lloyds promised to pass on in full any reductions in base interest rates in 2008 and 2009 to SMEs as part of a six-point charter to help them weather the economic downturn. HBOS separately said it would use 250 million pounds of European funding to provide more attractive lending facilities to SMEs. Northern Rock, which was nationalised early this year, followed rival Royal Bank of Scotland, now majority state-owned, by pledging not to repossess any homes for at least six months after a customer falls behind with payments. The bank said when it repossesses a house the customer is 15 months in arrears on average. Major banks say they are lending more to small businesses than in recent years. Loans to small businesses grew 1.8 percent, or almost 1 billion pounds, in the third quarter, according to British Bankers' Association data. But the PMI data backed up complaints from small business lobby groups and anecdotal evidence suggesting credit has been turned off, with industries complaining overdrafts have been cut and charges increased. (Additional reporting by Christina Fincher, Jodie Ginsberg and Frank Prenesti; Editing by David Holmes, Elaine Hardcastle and Phil Berlowitz) ($1=.6786 Pound) Keywords: HBOS/ Keywords: HBOS/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved.

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