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* Says time frame for RBS privatisation has accelerated
* Says more interest in RBS from investors this year
* Says will consider sale of RBS shares to retail investors
* Says needs more clarity on future litigation before sale (Adds further comments from UKFI)
By Matt Scuffham
LONDON, Oct 21 (Reuters) - Britain is closer to selling partof its stake in Royal Bank of Scotland after seeinggrowing appetite for the bank's shares from financialinstitutions and it could offer some of the stock to privateretail investors.
A sale would allow the British government to start sheddingits 80 percent holding in RBS, which was rescued through a 45billion pound ($73 billion) bail-out during the 2007-2009financial crisis.
Oliver Holborn, head of capital markets at UK FinancialInvestments (UKFI), a government agency which manages the stake,said he had been contacted by institutions interested in buyingRBS shares and the prospect of the bank returning to privateownership had accelerated this year.
"We are definitely seeing more interest from institutions about investing in RBS. If you speak to institutional investorsthey will tell you that (RBS Chief Executive) Ross McEwan hasmade very good progress this year in terms of trying to make RBSa simpler, better bank," Holborn told parliament's TreasurySelect Committee on Tuesday.
Reuters reported earlier this month that the chances of thegovernment selling shares in RBS had risen this year and that itsaw a first sale as being possible in the next two years.
Holborn said he had met with the agency's advisor JP Morgan more than 5 times to discuss the issue in the pastmonth.
Shares in RBS are currently trading at 358.5 pence, wellbelow the government's 502 pence a share buy-in price, leavingtaxpayers sitting on a paper loss of nearly 13 billion pounds($21 billion).
UKFI Chairman James Leigh-Pemberton told the committee thatit would consider offering RBS shares to private retailinvestors as well as financial institutions when it comes tosell, partly because it would enable them to sell off more ofthe government's stake.
"The inclusion of retail has the benefit of enabling alarger size (of sale) than would otherwise be achievable," hesaid.
A planned sale of part of the government's remaining 25percent stake in Lloyds Banking Group to retailinvestors was cancelled this year because the shares were nottrading at a high enough level.
Holborn said UKFI would need more clarity on futurelitigation issues potentially affecting RBS before any sale.
"There are a number of outstanding issues that need to bedealt with in particular on the conduct and litigation sidewhere the sizes of some of those issues are at this stageunknown," he said.
RBS is one of six banks in talks with Britain's financialregulator to settle allegations its staff were involved in therigging of the global $5 trillion-a-day currency market. It isalso being investigated by regulators looking into its treatmentof struggling small British firms and its selling of bondsbacked by residential mortgages in the United States.
Leigh-Pemberton said the government over-ruled plans by RBSto pay some staff bonuses worth twice their basic pay earlierthis year to avoid a backlash from Britons unhappy about paylevels at the bank.
Leigh-Pemberton said UKFI had recommended RBS be allowed topay that level of bonus to help it retain staff and attract toptalent. But after the Treasury intervened, RBS was told it couldpay bonuses worth only the same as staff's basic pay.
"In order to avoid a major public controversy at that timeit was considered that it would be more appropriate not to putthat resolution to shareholders," he said.
$1 = 0.6193 British Pounds) (Reporting by Matt Scuffham, editing by Simon Jessop and JaneMerriman)
