The Royal Bank of Scotland ended 281 years of independent banking yesterday as the Government took a 58 per cent shareholding, making RBS in effect a state-owned bank.

The change in its status, which came about because private investors snubbed its £15billion share offer, poses new challenges to RBS managers, and places politicians squarely in the middle of conflicting public and commercial priorities.

For the bank's managers, the priority is to reduce the amount of outstanding loans, particularly those with a high risk of default.

For politicians - and their hard-pressed constituents - the objectives are somewhat different. They want to see the banks lending money and helping the country out of recession.

Politicians in Scotland said yesterday that there was a clear need for balance between commercial and public interests, but were unsure how that could be achieved particularly if controversies over job losses were to arise.

RBS has signalled that it is sensitive to government and public concerns about the recession by announcing that it is not going to change the limits, or raise interest rate charges, on small business overdrafts for at least 12 months. It estimates that the move will benefit about one million small businesses.

However, it may have to make more changes. Newcastle-based Northern Rock, which became 100 per cent publicly-owned almost a year ago, had to limit the new mortgages it could sell and the deposits it could receive from savers who thought nationalisation meant the bank was much safer than others. Other banks complained that this was an unfair competitive edge.

It has caused political controversy in its north-east England heartland when it said it would have to cut 2,000 jobs from its 6,000-strong workforce.

The bank's executives, whose relationship with government is covered by a shareholder framework document, are now in regular contact with the Government. Its dealings with MPs handling complaints from aggrieved constituents have also increased markedly.

An RBS spokesman said that the bank's chief executive, Stephen Hester, had been deputy chairman of Northern Rock for six months under government ownership. His experience was that the government expected a hard-headed commercial approach and there had been no undue government interference. Mr Hester expected RBS to be sensitive to the public interest because of its status as a global bank.

Derek Brownlee MSP, the Conservative's Holyrood finance spokesman, said: “I think that it would be a big mistake by politicians if they got involved with the running of the bank.

“There will be difficulties if a constituent comes to us and says that they want to get better terms from the bank, but I would be very, very wary of going down a road like that.”

Business, page 71

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