HSBC <0005.HK> decided to opt out of Britain's new scheme to boost the supply of bank lending to smaller and medium-sized enterprises (SMEs) for financial reasons.

HSBC said on Tuesday that while it supported government moves to get more credit flowing to business, the nature of its funding base and the way the scheme was structured made it difficult to participate.

HSBC said most of its funding came from customer deposits rather than wholesale financial markets, meaning it can raise funds more cheaply than other banks.

That, in turn, meant that using the guarantee from the government in the new SME loan scheme would cut HSBC's borrowing costs only slightly, meaning it would lose money on lending to SMEs after paying the fee to the Treasury for the guarantee and other costs involved in the scheme.

HSBC is predominantly funded by customer deposits and unlike many banks has little need to access the wholesale markets to provide lending to UK businesses. Indeed, we are a net provider of liquidity to the market. Therefore, under the structure of the National Loan Guarantee Scheme, HSBC is unable to participate on commercially viable terms, it said.

HSBC said its net lending to SMEs rose 4 percent in 2011, and it was confident it could serve small business clients well without the need to be part of the new loan scheme.

(Reporting by Sudip Kar-Gupta; Editing by Dan Lalor)