Banks are starting to boost lending to cash-starved households and businesses as part of an £80 billion plan to free up credit, the Bank of England said today.
The Bank revealed it had seen an "early impact" of its Funding for Lending scheme as borrowing rates begin to come down, but warned it may not be able to prevent total lending from falling over the next 18 months as wider global economic troubles continue to weigh on markets.
The Bank confirmed 13 banks and building societies - accounting for around 73% of UK lending - have signed up to the programme, which started in August by offering banks cheap funding on the condition that they increase lending to businesses and households.
Lloyds Banking Group, Barclays, Royal Bank of Scotland, Santander and Nationwide Building Society are among those on the list.
HSBC has not joined the scheme, as it uses deposits from retail customers to lend - although it said it had not ruled out signing up in the future.
Speaking at Richmond University, Bank of England executive director for markets Paul Fisher said he was "confident" the scheme would help boost the supply of credit in the UK after early encouraging signs since its launch.
Banking groups - such as part-nationalised Royal Bank of Scotland - have already begun reducing borrowing rates on some of their products and easing lending terms and conditions.
Mr Fisher said: "Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions."
He added: "Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months. Perhaps it still may. But any return to positive credit growth would be a better outcome than we could have previously hoped for."
RBS was the first bank to announce cheaper loans directly linked to the Funding for Lending initiative, cutting rates for mortgage borrowers, small businesses and more recently manufacturers.
It said it had made more than £1 billion of discounted loans available thanks to the scheme.
Fellow state-backed player Lloyds also confirmed last week it had drawn down £1 billion from the Bank of England and would start lending the money out within the coming weeks.
Mr Fisher said while 13 banks had signed up initially, there were a "significant number" of other groups close to signing up.
Figures out today from the British Bankers' Association (BBA) also showed tentative signs of improvement in lending conditions, with mortgage approvals rising slightly between July and August from 29,000 to 30,533 last month.
But while the BBA confirmed signs of increased competition on mortgage rates, most of this has been aimed at borrowers with larger deposits.
And on a year-on-year basis, mortgage approvals fell 13% in August, the BBA said.
The Bank and Treasury took coordinated action to launch the scheme after fears were raised of a second phase of the credit crunch as wholesale funding markets tightened in the face of the UK's double-dip recession and eurozone crisis.
Under the programme, banks are being offered funding at low interest rates over a four year period, which will be linked to bank lending performance to encourage lenders to increase loan availability and reduce rates.
For every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the scheme. Those which reduce lending will have to pay higher fees to use the scheme.
The Bank will release a league table of bank net lending each quarter to show how the banks have been performing since the launch of the scheme.
Mr Fisher said the publication of bank-by-bank lending details would intensify pressure on banks to lend more, but added that shareholders of Britain's banks should also urge management to use the scheme.