UK bankers say election stalemate threatens to hit business lending

* Uncertainty could affect loan demand

* Funding costs could increase for UK banks

* HSBC, Standard Chartered (Other OTC: SCBFF - news) fear further tax hike

* Lloyds, RBS (LSE: RBS.L - news) vulnerable to market share caps

By Matt Scuffham

LONDON, May 6 (Reuters) - Lack of a clear winner in Britain's national election on Thursday is likely to impact the appetite of businesses to borrow, senior bankers told Reuters.

Banks are reluctant to be seen to be taking sides, but banking executives are privately expressing concerns over the prospect of effectively having no government for weeks or even months after the results.

Both the Conservative Party, which has led a coalition government with the Liberal Democrats for the past five years, and the opposition Labour Party are expected to fall short of an overall majority.

They will need the support of smaller parties to form a new coalition or try to govern with a minority in parliament. Under either scenario, the government's stability will be tested in the coming months and there could even be second election.

The uncertainty could lead to an increase in funding costs for British banks, which would likely to be passed on to customers, senior bankers said.

"The biggest concern is a period of 'drift,' that no outright winner will produce a lack of confidence and uncertainty that will last for weeks," a senior executive at one of Britain's biggest banks told Reuters. "A prolonged period of uncertainty would not be good."

The British Bankers Association said caution among borrowers would be more likely to affect lending volumes in the event of uncertainty rather than any reluctance by banks to lend.

"As we stand now I don't think that there's any evidence that the supply side of the lending equation has been impacted at all by the political uncertainty," the BBA's Chief Economist Richard Woolhouse said.

Senior bankers fear that policies pursued by both major parties threaten to destabilise the industry and want to find out quickly what the plans are rather than wait for months.

For domestic banks, the biggest fears revolve around Labour's threat to impose market share caps in areas such as retail banking and small business lending.

This would potentially impact state-backed Lloyds Banking (Xetra: 871784 - news) Group, which controls around a quarter of personal current accounts and Royal Bank of Scotland, which has a similar market share in small business accounts.

HSBC and Standard Chartered are both looking at whether to keep their headquarters in Britain in response to Labour's plans to increase an existing bank tax, which has already been hiked eight times since it was introduced by the Conservative-led coalition in 2011.

HSBC also has concerns over the Conservatives' commitment to holding a referendum on Britain's membership of the European Union in 2017. This is a factor in its review of its home base, citing the impact Britain's exit would have on the economy.

(Editing by Jane Merriman)