A man sits on a bus as it passes the Bank of England in the financial district of the City of London. Picture: Reuters

London - Net lending by banks and building societies taking part in the Bank of England's Funding for Lending Scheme (FLS) was 1.6 billion pounds ($2.5 billion) in the second quarter, an improvement on the previous three months.

In the first quarter, banks took more cheap funds from the scheme than they lent to customers, shrinking net lending by 300 million pounds.

Banks have drawn down 17.6 billion pounds of cheap funds from the FLS, set up to stimulate lending to UK households and businesses, since it opened last August.

However net lending has fallen by 2.3 billion pounds overall since June 2012.

Paul Fisher, the central bank's executive director for markets, said the scheme was continuing to support lending to the UK economy with a range of indicators suggesting that credit conditions were steadily improving for housholds and companies.

“FLS participants collectively expect net lending volumes to pick up over the remainder of this year,” he said.

The biggest net lenders during the quarter were Nationwide , Lloyds Banking Group, Virgin Money and Barclays, according to Bank of England data.

State-backed Royal Bank of Scotland and Spain's Santander continued to significantly cut their net lending, however. Santander has cut its net lending by 10.4 billion pounds in the last year, and RBS has cut its net lending by 6.8 billion.

RBS is attempting to shrink its balance sheet, while Santander is using more of its capital for business lending and as a result has cut its residential mortgage lending.

Lloyds Banking Group, which is Britain's biggest retail bank and is 41 percent owned by the government, returned to positive lending in the second quarter, with net lending of 1.3 billion pounds.

Building society Nationwide was the biggest net lender, with 2.3 billion pounds lent.

Barclays and Nationwide were in June ordered to improve their leverage ratios by the Bank of England, however, which could have the unintended consequence of slowing their lending.

Barclays and Nationwide has each lent more than 7 billion pounds net in the last year, over three times more than the next biggest lender. - Reuters