Last checked at 
* FLS to be extended by one year to January 2015
* Incentives skewed towards small business lending
* Banks also allowed to lend to alternative finance firms
By William Schomberg and David Milliken
LONDON, April 24 (Reuters) - Britain sought to inject newlife into the country's stagnant economy on Wednesday by givingbanks greater incentives to lend to small and medium-sized firmswhich complain they are starved of credit.
The Bank of England and the Treasury said a new phase oftheir flagship Funding for Lending Scheme would be heavilyskewed towards smaller firms.
Banks taking part in the programme will also now be able tolend to alternative providers of credit - such as leasing firmswhich often work with small companies - as well as mortgage andhousing credit corporations.
Under a third change, banks can get funding from the FLS foran extra year until the end of January 2015.
The Bank of England and the government see a lack of creditto small businesses as a major factor behind Britain's very slowrecovery from the financial crisis. On Thursday, data could showthe economy slipped into its third recession in under five years
Finance minister George Osborne is under pressure to boostgrowth after concerns from the International Monetary Fund -previously a supporter of his austerity policies - said he mayneed to slow the pace of spending cuts.
He announced measures to boost the housing market in Marchand employers groups welcomed Wednesday's changes to the FLS.But they said it remained to be seen whether banks would becomeless risk-averse and lend to such borrowers as start-up firms.
"What a lot of SMEs (small and medium-sized enterprises)will be looking for is money actually getting to the front lineon reasonable terms, and not just to the safe bets," said AdamMarshall, policy director at the British Chambers of Commerce.
Economists said the changes were not a game-changer for theeconomy. "The FLS is likely to provide a boost when confidencereturns to the economy, but confidence is the elusive factor,"analysts at Barclays said in a note to clients.
Alan Clarke, an economist at Scotiabank said the changeswere probably a complement to more broad-based stimulus in thefuture by the Bank of England, and were unlikely to stop it frombuying more government bonds later in the year.
INCENTIVES TO LEND TO SMALL FIRMS NOW
The original FLS was launched last August and offers bankscheap credit if they increase lending to households andbusinesses. Results have been mixed, with benefits so far mainlygoing to banks and homebuyers rather than small businesses.
Banks drew 14 billion pounds ($21 billion) in cheap fundingfrom the Bank of England between August and the end of last yearbut the FLS failed to stop a decline in overall bank loans atthe end of 2012, adding to pressure on the government to takemore action.
Bank of England Governor Mervyn King said the extension ofthe FLS would assure banks about their cheap funding rates.
"This innovative extension will now do even more for smalland medium-sized businesses so that they can play their fullpart in creating new jobs," Osborne said in a statement.
One of the changes announced on Wednesday seeks to getcredit to small and medium-sized firms flowing as soon aspossible: for every pound of additional lending by banks to thesector in the remainder of 2013, the amount of funding thatbanks will be able to draw upon increases by 10 pounds.
In 2014, that falls to five pounds of FLS funding for banksfor every pound they lend to SMEs.
Lending to other sectors will count on a one-for-one basistowards the allowance for banks accessing the scheme.
Cormac Leech, a banking analyst at Liberum Capital, said the10-to-1 ratio to increase bank lending to small firms this yearwould help banks such as Royal Bank of Scotland andLloyds, which are Britain's biggest business lenders.
"They are highly incentivised to write SME loans even at anunderwriting loss. So it's a key positive for them and shouldhelp to drive their share price and sector earnings," he said.
Employers groups want more competition in Britain's bankingsector as a way to spur fresh lending. Those hopes suffered ablow on Wednesday when the planned sale of 630 bank branches byLloyds to the Co-Operative Group fell through.
