Royal Bank of Scotland has committed a £3 billion fund for lending to small businesses.

The cash is part of the bank’s pledge to increase lending to UK borrowers by an additional £6 billion, as the government puts pressure on banks to support small and medium enterprises (SMEs).

Business secretary, Lord Mandelson, said: “More funding must be made available at branch level to enable viable companies to access the finance they need to weather these difficult financial conditions.

“I would like to see other lenders taking similar steps to ensure their frontline managers have access to funds dedicated to helping UK SMEs.”

Locally administered funds will offer business customers financial support including flexible business loans allowing borrowers to take payment holidays, access short-term financing and use assets to secure credit, RBS said.

Small firms will also get a reduced rate on loans from the £250 million funding the bank recently secured from the European Investment Bank.

Alan Dickinson, chief executive of RBS UK, added: “The funds have been designed to give business customers the further confidence to focus on running their business rather than having to worry about their finances.”

The Federation of Small Businesses welcomed the move. Spokesperson, Stephen Alambritis, said: “We welcome the Royal Bank of Scotland decision.

“We think it is important the help for small businesses happens as soon as possible and we hope the other banks follow suit.”

RBS, which is now 70 per cent nationalised, has already promised small firms can keep their overdrafts for the agreed term.