Lending to small and medium businesses by high street banks fell £435 million in the second quarter of the year, following a £719 million decline between January and March.

The Bank of England figures come despite revamped rules for the Funding for Lending Scheme (FLS), which is designed to encourage lending to growing UK businesses.

FLS was launched in 2012 and offers banks cheap credit in return for lending commitments. But lending has dropped by more than £4 billion since. The most recent figures show £3.2 billion was dished out via the scheme in the second quarter.

Lloyds Bank was the most active, drawing £2 billion through the scheme during the period. It also lent the largest amount to small businesses at £384 million. Challenger bank Aldermore and Investec drew £118 million and £136 million respectively.

Anil Kapoor, director at accountancy group BDO, said the news was good for alternative lenders who were gaining popularity while bank lending was slowing.

“The alternative finance sector is doing well in a market where bank business lending has slowed down substantially,” he said.

“Today’s FLS figures show that while the government initiative is well meaning, the big participants in the banking industry are not fulfilling market requirements.

There is clearly more demand from businesses than is being serviced and this is where the alternative lending market is cementing its place as a legitimate solution to the liquidity shortage.

He added: “These lenders must look to the future to ensure their own sustainability in an increasingly volatile environment.”