UK's RBS has failed to support small businesses - review

* RBS (LSE: RBS.L - news) 's market share of SME lending has fallen steeply since 2010

* RBS 'screens out' more applications at pre-application stage

* RBS staff 'risk-averse', lending not top priority

* CEO accepts recommendations, vows to act on findings

By Matt Scuffham

LONDON, Nov 1 (Reuters) - Part-nationalised Royal Bank of Scotland has failed to support small businesses in a way that meets its own targets and the expectations of customers, an independent review commissioned by the bank concluded.

The review, led by former Bank of England deputy governor Andrew Large, said RBS's market share of small business (SME) lending had fallen steeply from 2010 and would continue to fall below the level expected given its number of customers.

The review attributed much of the decline to the fallout from RBS's 45.5 billion pound ($73.15 billion) bailout in 2008, which left taxpayers holding an 81 percent stake. RBS has since focused on selling off or winding down its riskiest loans in order to strengthen its financial position.

RBS's total lending to small businesses was 55 billion pounds when the market was at its height in early 2009 and has since fallen to 38 billion, the review said. Its market share of small business lending among high street banks has fallen to 33 percent from 40 percent at the peak.

"RBS deserves credit for the way it has tackled some of the shortcomings in its SME business during a period when the group was battling for survival. However, there is much that still needs to be done," Large said in a statement on Friday.

The review said loan applications at RBS took longer than at other banks and the process needed to be simplified and accelerated. Communication with customers needed to be improved and safeguards had to put in place to ensure businesses in financial distress were treated appropriately.

ACTION PLAN

RBS Chief Executive Ross McEwan said he accepted the review's recommendations and would act on its findings. He promised to take immediate steps to improve the bank's support for small businesses and Britain's economic recovery.

These include: writing to thousands of businesses setting out how much the bank is willing to lend them; cutting the length of time that loan applications take; and ensuring more decisions are made locally and by sector specialists.

"The picture Andrew Large paints is not an entirely comfortable one, but it's one we have to confront. A successful, vibrant, and well-regarded SME bank is central to the overall value and reputation of this company," McEwan said.

RBS appointed Large, a former deputy chairman of Barclays (Frankfurt: BCY.F - news) , and management consultants Oliver Wyman to conduct the review in July, having come under pressure from lawmakers to lend more.

The review found that, having lent aggressively in the run-up to the 2008 crisis, RBS's lending to small businesses had fallen faster than its rivals and its market share had dropped from an unsustainably high level in 2008. It concluded that RBS's contraction in lending had "overshot" and the bank had not lent as much as it intended to small businesses.

The review said the main difference between RBS's lending criteria and those of other banks was the extent to which it "screens out" customer enquiries at the pre-application stage. It said RBS staff were risk-averse and not as focused on lending as they were on deposit gathering and risk management.

That led to a perception among borrowers that RBS was unwilling to lend, with a recent survey showing 30 percent of small businesses disagreed with the statement that RBS was "open for business".