The government is to insist banks improve their treatment of small businesses as part of its bailout package.

One of the conditions of the £37bn bailout to Royal Bank of Scotland, Lloyds TSB and HBOS is that banks return to 2007 lending levels while the business secretary Lord Mandelson is also calling for greater sensitivity when dealing with small companies.

Small firms were being asked to provide more security for loans and pay higher interest rates and charges, he said.

The government fears many small businesses will go bankrupt as a result of a lack of funding from banks.