Small and mid-sized U.S. banks can hold off on repaying funds under the Treasury's Troubled Assets Relief Program, as they may escape government pressure to raise capital and face less taxpayer scrutiny over compensation practices.

There's no benefit to having more shares put out in the marketplace, veteran banking analyst Richard Bove told Reuters. You gain nothing by paying back the government preferred other than seeing management increase its salary.

Smaller banks also face less public scrutiny than some larger ones, as the comparatively lower amount of funds they received under the program are not expected to leave a huge hole in taxpayers' pockets.

Raymond James analyst Anthony Polini said although his outlook for small and mid-cap banks is bullish, there is hardly any scope for external pressure on banks to pay back the funds.

The big banks wanted the government intervention to be lessened, and the government wanted to get back a large portion of what it doled out, Polini said. A bank with $150 million in TARP is not going to make a difference; $25 billion makes a difference.

I don't see any political pressure, and from a financial standpoint I don't see any rush, he said.

After posting another dismal year of earnings, many small firms are still battling for survival and maintaining capital is the key objective there, so TARP repayment takes a back seat.

Citigroup Inc and Wells Fargo & Co said earlier this month they were paying back funds to the U.S. government, in transactions that will end taxpayers' capital support of the biggest U.S. banks much sooner than had been expected only weeks ago.

Both banks faced pressure to repay the United States after Bank of America Corp announced plans to repay $45 billion it received from the government.

The U.S. Treasury came out with a massive program last year aimed at increasing lending at troubled banks. The Treasury has invested in more than 600 banks under the program.

NO MORE TARP

Regulators and the government are unlikely to encourage quick repayment from smaller banks, as a slowdown in economic growth could put the companies in trouble again.

In contrast to the larger banks that have diversified operations, fortunes of the smaller banks are more attuned to the economic conditions as they focus mainly on traditional lending and borrowing functions.

The regulators actually seem reluctant to allow banks to pay back TARP if they are not on a sound capital footing, Sandler O'Neill analyst Avi Barak told Reuters. If there is a situation when the economy has a second letdown, then these banks would have to take TARP again.

More than $185 billion of the $245 billion that TARP invested in banks is now slated to be returned to taxpayers -- with $90 billion scheduled to come back in this month alone. However, none of the repaid money is likely to be recycled to institutions that are still struggling.

I think Treasury is going to try to avoid providing assistance to someone who is not going to have the financial stability to repay or make their dividends, FTN Equity Markets analyst David Darst said.

However, relatively healthier companies like S&T Bancorp and Fulton Financial are likely to repay TARP sooner than peers, he said.

Similar-sized Valley National Bancorp paid back the Treasury in two installments, while City National Corp , which finished an immediately accretive FDIC-backed deal on Friday, also made its intentions clear to repay the government.

Still, some players like Georgia-based lender Synovus Financial , which got close to $1 billion from TARP, are struggling to convince investors that they have the ability to survive the downturn without raising further dilutive capital, let alone repaying the government.

In a situation where an already bailed-out bank needs more money to survive, the Treasury is more likely to close the bank altogether, analysts said.

U.S. regulators closed seven lenders last Friday, bringing the total number of U.S. bank failures this year to 140, as smaller institutions collapse at a rapid clip because of deteriorating loan portfolios and related liquidity and capital issues amid a weak economy.

(Reporting by Anurag Kotoky in Bangalore, Editing by Dinesh Nair)

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