Ministers backed down over plans to charge interest on crisis loans offered to some of Britain’s poorest families today after a storm of protest.

Conservatives accused the Government of behaving like loan sharks with William Hague calling the idea “astonishing and outrageous”.

But work and pensions minister Kitty Ussher said the Government was “absolutely not” proposing charging interest on loans from the social fund, which currently pays out £500 million a year.

She said that ministers were considering involving credit unions in the distribution of the loans. But while credit unions are permitted to charge interest of up to 2 per cent a month on their own loans, they would not be allowed to do the same with Government products.

Ms Ussher told BBC News Channel: “We are absolutely not proposing to charge interest on social fund loans. I think that would be the wrong thing to do.

“We do propose expanding the way that crisis loans work, to make them more available to more people, but we are not proposing charging interest.

“I think the confusion has arisen because one of the things we do want to do is explore partnership working with great organisations which in local communities do give affordable credit, such as credit unions.”

But the consultation document does not explicitily state that the Social Fund payments will remain interest free and it provides an estimate of the impact of charging interest on the crisis loans.

It says: "In 2007-08 the average initial budgeting loan award was £433.30. The estimated average loan repayment for all loans was £10.54 a week. If interest were charged at 2 per cent a month it would take 46 weeks instead of 42 to repay such a loan at such a repayment rate with a total interest paid of £47.80."

The DWP proposal suggests that credit unions and similar organisations from the third sector would take over the provision of "credit to social fund customers". As well as "offering affordable loans", these organisations could also offer a range of other services. Any credit offered under these arrangements could attract interest charges from 12.68 per cent to 26.8 per cent APR.

Ms Ussher rejected claims that ministers were behaving like loan sharks. They were lending money at rates of up to 1,000% and ministers wanted to make credit more easily available so that people in difficulties are not tempted into their hands, she said.

Union leaders said any such plans should be dropped immediately.

Mark Serwotka, General Secretary of the Public and Commercial Services Union said: “These plans are scandalous.

“On the one hand the Government has spent billions bailing out the banks, yet on the other they are considering penalising some of the poorest with loan shark rates.

“These proposals go where even Thatcher wouldn’t and should be dropped.”

Chris Grayling, the shadow welfare secretary, said he had written to James Purnell asking him to drop the proposals.

He said: "I just don't understand why on earth the Government would come up with a plan like this in the middle of a recession, when unemployment is rising by thousands each week. Gordon Brown keeps criticising the Banks for charging excessive rates of interest. But when he thinks no one is looking, he does exactly the same himself. It makes him look like a loan shark, and is a real sign that he just doesn't realise that his economic policies aren't working, and that the economic reality out in the country is pretty grim."

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