Chancellor George Osborne launches his much-vaunted 20 billion pound credit easing scheme to help small companies on Tuesday, but critics argue the plan will make little difference to cash-starved firms.

With Britain's prized triple-A credit rating under growing pressure, Osborne has no room for any giveaways in his March 21 budget and is hoping that the scheme will kick-start a private sector recovery to fill the gap in demand left by the government's austerity measures.

But cracks have already started appearing in the National Loan Guarantee Scheme (NLGS): Only four of Britain's five major lenders have signed up to participate, with HSBC saying it is not commercially viable for it to offer the loans.

Treasury officials admit that the scheme is less attractive to banks that have a strong deposit base and therefore do not rely on funding from wholesale markets, or for banks that already benefit from low borrowing costs. Moreover, if market conditions improve, banks may decide to leave the scheme.

Meanwhile, business groups argue that the NLGS, which is open to firms with a turnover of up to 50 million pounds, does not address the issue of banks' stringent lending conditions, which they say pose a bigger obstacle to firms getting loans than the cost of credit.

While credit easing is a step in the right direction, it is not a panacea for all the problems faced by businesses trying to access finance, said British Chambers of Commerce director general John Longworth.

It will not help the smaller, younger, and high-growth firms that have trouble getting credit in the first place.

CHEAP CREDIT

Even though official interest rates are at a record low and the Bank of England has pumped hundreds of billions of pounds into the financial system, central bank data show money has not been getting through to small businesses.

The euro zone sovereign debt crisis, combined with weak domestic demand and an uncertain economic outlook, has made banks reluctant to lend to small firms, while companies lack the confidence to take on debt.

Osborne said the aim of the NLGS was to allow firms to benefit from the ultra-low borrowing costs currently enjoyed by the government.

It's only because we've earned credibility with our deficit reduction plan that we have low interest rates, and it's only because of this scheme that we can pass the benefits of those low rates onto businesses, Osborne said in a statement.

Banks participating in the NLGS will have to offer interest rates that are 1 percentage point lower than loans outside the scheme, so a business receiving a loan of 1 million pounds could receive a discount of up 10,000 pounds a year.

The Treasury said it would offer 5 billion pounds in guarantees in a first tranche, with factors such as market share, gross and net lending, track record of lending to small businesses, and capacity to lend under the scheme determining the size of a bank's allocation.

The timing and size of further tranches would depend on demand, it said.

Banks will have to pay the government a fee to access the NLGS and give the government detailed quarterly updates on their lending. Moreover, the credit risk of individual loans remains with the banks: the government guarantee kicks in only if the bank does not repay its lenders.

Nonetheless, the amount of guarantees up for grabs is small change compared with the 59 billion pound funding shortfall that small firms face over the next five years, according to a government-commissioned report last week.

Business groups, some politicians and policymakers have urged the government to take bolder steps to boost lending, such as setting up a state-owned lending agency in the mould of Germany's KfW bank.

Britain's business minister, Vince Cable, has supported the idea of creating a state-owned bank that lends specifically to businesses, while the government-commissioned report last week suggested the creation of a new body to bundle and sell small business loans to investors.

For a longer-term solution, the government must act on recommendations in the Breedon review, which set out practical ways businesses could secure more 'patient' sources of funding over a longer time frame, said CBI director general John Cridland.

(Reporting by Fiona Shaikh; Editing by Dan Grebler)