Frankfurt -- German banks are facing a firestorm of criticism from the government and industry federations that accuse them of threatening small businesses with their tight-fisted credit policies.

More than 16,600 small and medium-sized companies in Germany failed in the first half of the year, 14 percent more than in the same period of 2008, the association Creditreform has estimated.

The bankruptcies affected 250,000 jobs and Creditreform has warned that a total of 540,000 jobs could be eliminated by the end of the year.

Tight credit policies have been a major factor in the failures, according to most official business administrators polled by ZIS, a research group specialising in troubled enterprises.

"Getting credit has become very difficult," administrator Markus Ernestus told AFP.

"Even companies that have a temporary need for cash to fill their orders are getting turned down."

The tight money approach prevails despite a steady monetary easing by the European Central Bank, whose benchmark interest rate has been brought down from 4.25 percent to a record low 1.0 percent.

"Banks have not lowered their rates, in order to build up their profit margins, and have raised their risk surcharges," said Karl-W. Giersberg, head of the federal small- and medium-sized business association BKM.

The banks are also under pressure from capital reserve requirements imposed by their lending. To reassure investors and to shore up their share price, banks often apply stricter standards than those prescribed by international practice.

As a result, warned Anton Boerner, head of the German exporters' association BGA, "a massive credit crisis" looms between now and the middle of September.

German banks reject the criticism, arguing that cooperative banks have made loans of 164 billion euros (231 billion dollars) to companies in the first quarter of the year, an annual increase of 4.7 percent.

Privately-owned Commerzbank has said the volume of its lending to small and medium-sized businesses came to 102 billion euros in the first three months, a slight increase from the year earlier period.

"Refinancing (via interbank lending) has become more costly," a Commerzbank spokesman told AFP.

"And worries about payment defaults by businesses have risen across the board."

The ECB, anxious to spark a revival in interbank lending, has for months been flooding money markets with cheap liquidity.

On Wednesday it made a massive sum, 442 billion euros, available to 1,100 banks through its first offer of 12-month funds.

"There is no reason for credit to be refused in Germany on grounds that there is a shortage of capital," insisted Finance Minister Peer Steinbrueck after the ECB action was announced.

The head of the German central bank, Axel Weber, has also encouraged banks to lend more money.

A bill already approved by the cabinet and to be voted on by parliament on Friday calls for the creation of "bad banks" within the national banking sector that would absorb troubled assets that might prevent institutions from granting credit.

The government is also considering assistance to credit insurers who would protect businesses against risks posed by customers who fail to pay their bills, according to press reports.

AFP/Expatica