Lending to businesses and households is expected to contract even more sharply this year despite efforts to reverse the trend, it has been forecast.
The respected Ernst & Young ITEM Club's report on the financial services sector said the UK's double-dip recession meant consumer credit would shrink 10.5% this year, rather than the 7.6% it forecast just three months ago.
Corporate lending is also set to decline by 6.2% this year, a similar rate to last year, and will contribute to an overall fall in lending by the banking sector of 2% in 2012, sharper than last year's 1.6% fall.
The ITEM Club said it remained cautious about the effectiveness of recent policy initiatives such as the Treasury and Bank of England's "funding for lending" scheme, which aims to free up the log jam in credit by offering banks cheap finance on the condition they pass it on to borrowers.
It said: "Although the schemes should help to lower banks' cost of funding, some banks may be reluctant to access these schemes for fear of the stigma it could create in financial markets.
"The potential positive impact on lending may also be outweighed by the recent deterioration in the economy. Banks will remain reluctant to lend in this environment and demand for credit is also likely to remain weak across all categories of borrower."
The report added that loans to the non-financial sector were not expected to match growth in the overall economy until 2014.
The prolonged period of recession has marginally raised the ITEM Club's forecast for corporate write-offs to 2% of outstanding loans, which is the highest rate since the 1990s.
But this is expected to represent the peak of the current economic cycle, with improved conditions next year likely to stem the tide.
And the period of low interest rates continues to shield banks and homeowners from increased impairments on mortgages, the report added.