Bank lending in the UK is set to shrink this year for the first time in 3 years, if the views of economic forecasting group, Ernst & Young Item Club, are to be believed.

Lending in general is expected to fall by 2.2% over the course of the year – with corporate loans down as much as 5.7% – hitting small and medium-sized businesses whilst at the same time affecting UK growth prospects.

The Item Club has also a predicted a 5.4% fall in loans being given to consumers, but also adds that consumers are increasingly open to alternative sources of finance, such as payday loans.

The group has also said that overall bank lending rose by 4.3% last year and that after contracting this year, they only expect lending to rise by 0.9% in 2013.

This year’s contraction in corporate lending is expected to hit hardest on the construction and real estate sectors and small companies.

Senior economic adviser for the Item Club, Neil Blake, had this to say: “Funding for small and medium-sized enterprises is likely to be particularly difficult to obtain as banks seek to reduce credit risk,

“The average interest rate on smaller loans, of £1m or less, is already double that charged on loans of £20m or more, and we expect this trend to continue.

“As these young companies tend to be high-growth businesses, this will have adverse knock-on effects for economic growth.”

Banks were requested to increase their lending to small businesses back in 2011 as part of an initiative produced by Business Secretary Vince Cable called Project Merlin.

The four largest banks in Britain – HSBC, RBS, Lloyds and Barclays – along with Santander, agreed to make £190bn available to business in 2011. From this sum, £76bn was given to small businesses, which is an increase of 15% percent from the previous year.

The Item Club predicts that the UK would generate about three-quarters of the revenues from any financial transaction tax (FTT) if it was applied across the European Union.

“Taking the EC’s estimates at face-value, if the FTT is introduced across the EU, the UK financial sector would generate around 75% of the total revenues,” said Mr Blake.

“However, even if the UK were to opt out of the FTT, if a reverse charge mechanism was applied, we expect the UK financial sector would still contribute around 60% of total revenues. Moreover, these revenues would flow directly to governments in the eurozone rather than to the UK Exchequer.”