AIB and Bank of Ireland are unlikely to meet their targets of €3 billion each in lending to small and medium sized businesses this year.

The Credit Review Office says that the main reason for the predicted shortfall in lending is that demand for credit from small businesses is low.

The Credit Review Office was set up almost 18 months ago to help small firms who had applications for credit turned down by AIB or Bank of Ireland to appeal the bank's decision.

Publishing his fifth report, Credit Reviewer John Trethowan says the two main banks are unlikely to meet their targets for lending to small business this year.

His report suggests that most firms are focused on repaying loans rather than getting new ones.

However, the Irish Small & Medium Enterprises Association has described the CRO's claims of a lack in demand from SMEs as 'arrant nonsense'.

ISME chief executive Mark Fielding said: 'The reality is, and has been for a considerable period, that the banks are refusing lending facilities to the majority of SMEs and in turn are failing to meet the lending targets set down by Government.'

He said it is an 'absolute disgrace and highly irresponsible' of the banks to claim, and the CRO to support the view, that SMEs are not demanding credit.

'This is completely contrary to the views regularly being expressed to ISME from member companies.

It said 'access to credit remains one of the most significant barriers for business and the lack of credit is directly responsible for hundreds of company closures and thousands of job losses.'

The Small Firms Association blames Central Bank policy that forces banks to be 'ultra risk averse' and has called on the Department of Finance to carry out a comprehensive survey of companies' lending needs.

Patricia Callan of the SFA said an immediate short-term lending boost is needed in the banking sector and the Government should introduce a loan-back scheme.

Mr Trethowan, who in the past has pointed to a lack of skills at the banks, has now called on business agencies to work to help educate the small and medium business sector on their business planning and financial skills.