Royal Bank of Scotland (RBS) has announced that it is to improve the borrowing terms for its 1.2m small business customers.

The bank - 70% owned by the taxpayer - will cap overdraft charges at 1.5% for any business with a turnover of up to £25 million.

RBS will also cap loan arrangement fees for small business customers at 1.5% and renew lending on the same or improved terms for at least 12 months. The bank will also offer free banking for all business start-ups.

"Businesses need to know that their credit lines are safe and how much they will cost. Commitments to guarantee overdrafts and commitments to transparency are a real help. We want these to make a real difference to the small business sector," said Stephen Alambritis of the Federation of Small Businesses.