Royal Bank of Scotland has missed its own targets for lending to small businesses, according to a review by a former deputy governor of the Bank of England.
The report by Sir Andrew Large came as RBS shares plunged 7.5 per cent on worse-than-expected profits and the bank took a £4.5bn hit as part of creating an internal bad bank for its riskiest assets.
Sir Andrew said: "RBS deserves credit for the way it has tackled some of the shortcomings in its SME business during a period when the group was battling for survival.
"However, there is much that still needs to be done. The bank has failed to meet its own SME lending targets, partly because they were unrealistic and also because of weaknesses in its lending operations."
Ross McEwan, RBS's new chief executive, said: "The picture Sir Andrew Large paints is not an entirely comfortable one but it's one we have to confront. Our aim is to become the number one bank for SME customer service in the UK and to grow our lending along the way."
Three out of 10 SME customers did not believe RBS was "open for lending", the report said. It also found that RBS's loan application processing took longer than other banks' and that staff on the front line were risk averse. Sir Andrew's report came as the Chancellor announced that the Federation of Small Businesses and the British Chambers of Commerce will jointly conduct a survey to show for the first time which bank offers the best service to small and medium-sized enterprises in Britain.
Mr Osborne said: "I want Britain's banks to do more to put Britain's small businesses at the top of their priority list, and this new survey will provide the means by which we can see who's up for the challenge and who isn't."
Mr McEwan said that most of the £4.5bn writedown prompted by the Government's decision to separate £38bn of its riskiest assets into an internal bad bank would be recovered as the assets are sold, which he hopes will be completed with three years.
He added: "The economy is recovering, so prices are reaching levels at which we will be able to sell these assets."
The bank also said the flotation of Citizens bank in the US, valued at anything from $9bn (£6bn) to $15bn, will proceed more quickly, starting in the second half of next year and completing in 2016. Mr McEwan said: "It is time for us to get moving forward. This makes sure of our capital position, making it secure for the next three years. We can now sharpen our focus on our core business, which is predominantly in the UK. The key thing is to keep it simple."
But RBS's third-quarter profits came in well below City forecasts. Operating profits more than halved from £909m to £438m as investment bank profits plunged. There was also a £250m hit for mis-selling payment protection insurance and £99m of "regulatory provisions".
Mr McEwan refused to comment on allegations of foreign exchange market manipulation and suspension of two senior traders but said the bank will "come down very severely on anyone we discover has been breaking the rules".
RBS shares fell 27.6p to 340p, well below the 499p average price paid for the taxpayer's 81 per cent stake.
Chequered history: Ulster Bank
Toxic loans at Ulster Bank make up nearly a quarter of the bad debts being hived off into the new internal "bad" bank at RBS.
Ulster has long been a thorn in RBS's side after the division was left with mammoth losses and crippling debts in the wake of the financial crisis and the implosion of Ireland's booming property market.
Ross McEwan said that the remaining part of Ulster will be included in a group-wide review – the results of which are due in February – as RBS attempts to find a "viable and sustainable business model" for it. However he added that it was "an important business for the whole island of Ireland and we understand the need to get this right".
It is the largest bank in Northern Ireland and the third largest in the Republic, with more than 1.9 million customers, and was acquired when RBS bought NatWest in 2000.
RBS and the Government have had to tread carefully, given Ulster Bank's importance as a lender to the whole island of Ireland, and the fact it is the last British-owned retail bank in Northern Ireland.
There will no doubt be fears the review will lead to further restructuring at Ulster, which is already cutting its workforce from around 5,800 full-time staff to between 4,000 and 4,500 by 2016.