British banks must do more to boost credit to smaller firms, the finance ministry said on Thursday, after data showed that the five largest lenders were on track to meet their overall lending targets agreed with the government.

Britain's biggest banks struck a deal with the government to boost lending earlier this year in return for legislative restraint.

As part of the so-called Project Merlin, they agreed to lend 76 billion pounds to small and medium-sized businesses but are running slightly below target so far, numbers up to the end of the third quarter showed on Wednesday.

Lending to small and medium-sized businesses has become a politically charged topic and Chancellor George Osborne has already announced a scheme of credit easing to boost lending to SMEs.

In a statement released after HSBC published third-quarter results, the last of the major British lenders to do so, a Treasury spokesman said: It's encouraging that today's provisional results show that UK banks have loaned over 157 billion pounds so far this year, which is 11 percent above target.

While banks have lent over 10 percent more to SMEs compared with this point last year, they must do more to ensure that they meet their Merlin commitments for the full year, he added.

Figures from the Bank of England show that net lending to businesses continues to decline and policymakers have warned that a lack of credit to SMEs is hitting investment and job creation.

The Bank's figures capture the credit facilities that have been actually drawn, whereas the Merlin deal includes all facilities made available.

While businesses have complained about difficulties in getting loans, banks have blamed a lack of credit demand caused by the uncertain economic outlook.

Commenting on behalf of the banks, the BBA lobby group said in a statement the numbers showed the banks' commitment to providing the financial support businesses needed to grow.

However, the overall economic environment remains challenging and business demand remains weak, the BBA said.

Britain's biggest banks made a deal with the government to make available 190 billion pounds of new gross lending to UK businesses this year, up from 179 billion pounds in 2010.

Banks have so far loaned 157.6 billion, the BBA said, well above an implied target of some 142 billion for the first nine months.

However, the Treasury noted that the 56 billion pounds in credit made available to SMEs in the first three quarters of the year falls 1.1 billion short of the implied target.

(Reporting by Fiona Shaikh and Sven Egenter)