David Cameron is holding talks with Bank of England Governor Mervyn King today to discuss ways of forcing banks it to do so.

The Prime Minister said the vast profits being unveiled this week suggested the industry had recovered from the credit crunch and was in a position to lend to businesses and home buyers.

The move comes after a Daily Mail campaign to get the banks lending again, which has highlighted their refusal to provide credit to the small businesses which are the engine of the economy.

Lloyds said sharply lower bad debts helped its recovery, with losses on loans turned sour more than halving in the first six months of 2010.

The Lloyds results smashed expectations in the City, with most banking experts expecting interim profits of around £800 million to £1billion.

The bank’s vastly improved bottom line performance followed a 51 per cent drop in impairments to £6.6billion in the half year, having been saddled with £13.4 billion in bad debts a year earlier following its rescue takeover of HBOS.

This week’s flurry of bank earnings – led by HSBC’s £7billion profit on Monday – will lead to renewed Government scrutiny on lending.

Northern Rock’s so-called ‘bad bank’ also posted a profit.

In a warning this week Chancellor George Osborne said the sector had an ‘economic obligation’ to lend to firms.

Business Secretary Vince Cable has also called for dividends and bonuses to be targeted in a ‘carrot and stick’ approach to boost lending to cash-strapped small firms.

Lloyds has committed to gross business lending of £44billion in the year to March and £23billion in mortgages in return for State support, but it fell way short of last year’s Government-set target for business loans.

However, its half-year figures are set to offer fresh hope that the taxpayer will exit profitably from its exposure to banking assets.