Alistair Darling and Peter Mandelson will meet the chief executives of High Street banks in Downing Street on Thursday and order them to lend more freely to small and medium sized enterprises.

Answering questions from MPs on the backbench Business and Enterprise select committee, the Business Secretary said that he "certainly will" tell the bank chiefs to play fair by small firms - and would order them to spend taxpayers cash they have accepted through the recent bailout on lending to small businesses.

"Our aim is to ensure that capital provided by the Government to the banks through recapitalisation is allocated through the bank in question to their small business lending division to meet demand for lending," said Lord Mandelson.

"We are also requiring banks to market lending to SMEs, so that small businesses know that the banks are open for business."

He said that levels of lending in 2007 would be used as a point of comparison to see if banks were complying. He denied that the Government was forcing banks to return to their risky lending ways that helped produce the current financial turmoil.

"We are not second guessing the banks' judgment on lending decisions, banks will continue to use their own credit assessments, but they do have to offer competitive rates that will attract good business propositions, and I think 2007 gives us a good benchmark to measure this upon. We want banks to be responsible but not entirely risk averse here."

Business people have complained of a dearth of credit for them to develop their enterprise in the current economic downturn. They also accuse the High Street banks of calling in their existing loans or unilaterally renegotiating them on less favourable terms.

When a committee member accused the banks which have so far refused to accept recapitalisation from the Government - and are therefore less susceptible to Government pressure on how they conduct their business - as being the "worst offenders" in turning off the supply of loans to SMEs, Lord Mandelson said: "It's a very important point, and one that we will be discussing on Thursday.

"The three recapitalised banks do make up 50 per cent of small business lending, but given that they are competing with other banks we can expect other banks to match this activity in the market place. They don't want to fall behind in their lending in a way that will put them at a permanent disadvantage."

Lord Mandelson has also promised earlier this morning that the Government will be taking action to improve cash flow to small businesses through a new policy of paying its bills within ten days.

He told MPs that the Communities Secretary and the Health Secretary would be writing to other parts of the public sector, requesting them to follow suit. The Regional Development Agencies committed themselves to a similar policy yesterday.

"I can confirm today that my colleagues Hazel Blears and Alan Johnson are writing to local authorities and NHS Trusts to ask that these bodies follow suit as well," he said.

Lord Mandelson told MPs that poor cash flows as creditors failed to pay on time, and lack of access to lending on fair terms, were the two main problems afflicting SMEs.

"The other source of cash flow is, of course, larger businesses themselves. We as a government can't force larger businesses to ensure that they pay promptly to the tens of thousands of smaller firms constituting their supply chains, but we can exhort them to do so, and we will do so powerfully and continually," he said.

David Cameron has called for a series of emergency tax cuts to help small businesses through the economic downturn, warning many would "go to the wall" without Government help.

As a first step, the Conservative leader called for a temporary one per cent cut in National Insurance for the smallest companies which employ four people or less. The move could save an employer up to £600 a year.

Lord Mandelson told MPs, however, that larger firms were unimpressed at the proposal that they should effectively be required to bail out smaller businesses by paying a larger share of the tax burden for the time being.

"The Chancellor has indicated to his colleagues that he is going to look at what options there are for the Revenue to show some flexibility and discretion to SMEs," he said.

"There have been proposals relating to VAT and National Insurance. There is also a concern among SMEs that rolling over payments on VAT will lead to an accumulation of debt that will be harder for them to discharge in the future."

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