Royal Bank of Scotland (RBS) has transferred a number of unprofitable small-business loans and overdrafts into a ‘non-core’ subsidiary in an attempt to reduce its exposure to bad debt in the small business sector.

The bank plans to wind down loans that it no longer wants on its balance sheet but has given assurances that customers would not notice any difference to their dealings with RBS.

"Earlier this year we announced plans to reduce the size of our balance sheet and the risks we are carrying as a business," a bank spokesman said.

"We are in the process of transferring a number of loans from our UK business customers into a new division to reduce our exposure in areas such as property.

"This is an internal exercise and will have no impact on the current lending agreements we have with our customers,” he added.

However, it is thought that affected customers may not be able to approach RBS for any more funding unless they agree to a higher rate on their existing loan. If a customer then makes an approach to a rival bank, it is likely that they will have to disclose that their application for a loan has been rejected.

Customers of the small and medium-sized business division, which handles companies with borrowings of up to £25m, will see their loans and overdrafts placed into either the core or non-core division.

The Times has reported that an internal RBS memo instructed that those who should be considered for the non-core area are those on its most competitive loan deals, which RBS offered at up to 2% above the Bank of England base rate.

Although RBS sold these loans to customers, the bank concedes that they are “not profitable”.

© Crimson Business Ltd. 2009