Taxpayer-backed Royal Bank of Scotland is launching a review of its small business lending after uncovering £20billion in untapped cash that could be used to support loan-starved companies.

The group, which is 81% owned by the Government, has hired former Bank of England deputy governor Sir Andrew Large and management consultancy Oliver Wyman to conduct an independent examination of the lending practices and standards used by RBS and NatWest for small and medium sized enterprises (SMEs).

It said it had discovered it has £20bn more in small business deposits than being loaned out to SMEs and wants to put this surplus to use by supporting firms and playing its part in “securing the recovery”.

The review comes amid mounting pressure on the banking giant to increase business lending and follows the launch of a sector-wide probe by the Office of Fair Trading into SME lending following calls for an investigation by the Parliamentary Commission on Banking Standards.

In its recent final report, the commission raised concerns that a lack of competition was leaving firms with little or no choice in accessing finance.

Following RBS boss Stephen Hester’s shock departure announcement, Chancellor George Osborne also made it clear the bank’s new chief executive would be expected to increase lending to Britain’s small businesses.

He said at the time: “Now is the time to move on from the rescue phase to focus on RBS being a UK bank that provides greater support to the British economy, helping businesses and job creation here.”

The bank’s net lending fell by £1.6bn in the first quarter of 2013, despite tapping the State’s Funding for Lending Scheme for £750million worth of cheap finance.

Sir Andrew said: “There is a disconnect between what the bank says it is doing on lending, and what many businesses say they experience on the ground.

“That is why we have been asked to conduct an independent review to establish what is going on, and what steps can be taken.”

Banks have been arguing that small business lending levels have continued to shrink due to low demand, but it is thought that firms are struggling to secure reasonable terms and cheaper rates in spite of the FLS boost.

Chris Sullivan, head of UK corporate banking at RBS, said: “Demand for lending remains a challenge, but we want to do more than just wait for demand to materialise.

“We want to play our part in securing the recovery. If there are loans that we could and should be making, but are not, then that will change. If there are things we can do better - we will.”

The review by Sir Andrew and Oliver Wyman will look at how RBS makes its decisions on SME lending and will consult with customers, business groups, regulators and the Government.

Sir Andrew - a senior adviser at Oliver Wyman, who also previously chaired Barclays and former UK regulator the Securities and Investment Board - will set up a dedicated website through which SME customers can provide their perspectives and experiences on RBS lending.

The review will take place this summer, with findings and recommendations published in the autumn.

RBS, which has a 35% share of the UK SME loans and overdraft market, said it saw a 20% reduction in borrowing applications from small firms last year.

Adam Marshall, director of policy at the British Chambers of Commerce (BCC), said the RBS review was a “sensible and welcome step”.

He added: “We would hope that other major lenders follow RBS’s lead, and shine a light on their own business lending practices.

“In order to improve transparency and trust, it is crucial that all financial institutions pledge to address any barriers, real or perceived, to SME access to capital.”

Forum of Private Business spokesman Robert Downes also welcomed the review.

He said: “This is just what small businesses will be wanting to hear at this delicate stage of the UK recovery.

“SMEs need cash to grow, deliver employment and create wealth, so the end result of this process could be an important driver of business growth.”

Business Secretary Vince Cable added: “As the biggest lender in the country, RBS is absolutely crucial to solving small businesses access to finance difficulties so this review is very welcome.

“There are plenty of good businesses out there desperate to expand and take on more staff, but they constantly tell me they’re being starved of credit.

“The business bank programme is encouraging alternative lending channels and more competition in the banking sector but the high street banks still have a huge part to play.”