View from City Road: A changing pattern in lending by the banks

National Westminster could lend another pounds 20bn if it could find creditworthy borrowers willing to take the money, according to Richard Goeltz, its finance director.

The problem the group faces is that its powerhouse, the UK bank, is short of business because so many customers will not or cannot borrow. But unless NatWest lends more, profits from branch banking will stay in the doldrums.

Mr Goeltz's claim should not be taken too literally. The markets would take fright if NatWest did find customers for another pounds 20bn to add to the pounds 106.5bn on its (risk-weighted) balance sheet.

Such a splurge would take the key capital ratios down to a level that no respectable bank would contemplate. But if Mr Goeltz's intention was to underline the fact that NatWest is now worrying more about market growth than bad debt, he succeeded.

The improvement in bad debt provisions is coming through just on cue as the cycle turns. But, before provisions and tax, operating profits of the domestic bank fell pounds 66m to pounds 511m between the two latest half years.

There is obviously a limit to what cost-cutting can do for the bottom line until there is a recovery in the market for the basic product, bank loans. Enthusiasm for the shares, prompted by the dividend increase, should not run away until there is more evidence of growth in lending.

Figures from the British Bankers' Association confirmed that in the second quarter companies continued to be net repayers of bank debt, because their finances are improving and - significantly - because larger firms are using the capital markets more. Higher lending was largely due to mortgages.

Whether or not banks are tightening credit standards to make it tougher for companies to borrow, customer behaviour has changed. NatWest said more than 40 per cent of start-up businesses used to borrow. Now the percentage has halved.

The good news is that the pressure on banks to maintain their share of a shrinking corporate loan market may allow a larger than usual number of hard-pressed customers to sidestep that bugbear of a recovery, the crisis brought on by a shortage of working capital.