British finance minister George Osborne urged the country's banks in a newspaper interview to use strong first-half profits to boost business lending rather than pay large bonuses.

Barclays , Lloyds Banking Group and Royal Bank of Scotland are all due to report first-half earnings next week, and many analysts expect hefty profits as the banks begin to put the financial crisis behind them.

In an interview with the Sunday Telegraph newspaper, Osborne said his stance was backed by the Bank of England, which has called on banks to set aside profits in preparation for the repayment of emergency central bank loans due next year.

We have got to be pretty clear with the banks, as I was when I got them into my office a couple of weeks ago, that we will not tolerate banks piling the pressure on SMEs (small- and medium-sized enterprises). They have an economic obligation to assist that sector and give it all the assistance that they got, Osborne continued.

If you maintain the remuneration and dividend levels of what they were a year or two ago then that would allow additional borrowing capacity, he said.

The British Bankers' Association, the industry's main lobby group, said that while banks were committed to providing finance to soundly managed companies, tough new capital requirements introduced in the wake of the crisis had left them with less cash to spare.

There are funds available to firms with a viable business plan, BBA Chief Executive Angela Knight said in a statement on Sunday.

But the industry's ability to support the economy needs to be considered as the increased capital and cash we are required to hold cannot be set aside and used to finance lending.

Knight added that the banks' anticipated return to profitability indicates that the sector is helping the UK economy move out of recession.

Britain's government owns large stakes in Lloyds and RBS, which together with Barclays and HSBC dominate the country's banking landscape. However, the bank stakes are held at arm's length and Osborne does not have direct control over Lloyds' and RBS's pay and lending policies.

The BoE lent British banks almost 200 billion pounds ($312 billion) during the height of the financial crisis in 2008. If banks reduce lending to businesses in order to make these repayments, this could derail Britain's private-sector economic recovery just as sharp public-sector cuts will start to bite.

Osborne said banks' business lending was already highly restrictive, echoing comments from business minister Vince Cable.

Every small and medium-sized company that I have visited in recent weeks has had some problem with their bank -- either they have found it difficult to renew their overdraft or they demanded additional collateral, often someone's house, Osborne said.

The danger is that, particularly next year, when there is a huge amount of refinancing required, that the small and medium-sized businesses suffer from a lack of access to working capital.

(Reporting by David Milliken, additional reporting by Myles Neligan; Editing by Michael Shields)

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