Banks are flouting the government's call to lower borrowing costs for business by levying rates of up to 7% above base rate, one of Scotland's industry leaders said yesterday.

Dr Peter Hughes, chief executive of Scottish Engineering, said: "We have had more complaints about the behaviour of banks over the past few months than ever before. Most of these complaints are about banks increasing their charges and transaction fees."

Hughes continued: "We've had companies tell us that some banks are now trying to charge as much as 7% above the base rate most of the complaints have been against HBOS." The organisation had received "no complaints at all" about the Clydesdale, he noted.

Royal Bank of Scotland, meanwhile, responded last night to claims from one Glasgow business that it was already breaking a promise to freeze the borrowing costs of small business from December 1.

Douglas Martyn, founder of Crystal Canopies, which has two factories in Glasgow and a turnover of £2.5m, negotiated a three-year loan in June to finance a joint venture at 2% above base rate. But when the papers came to be signed yesterday at the bank's business centre in West George Street, Martyn was shocked to be told the rate had just gone up to 3% above base.

The Bank of England is widely expected to cut interest rates again this week, possibly by 1%.

Martyn said his venture with an English conservatory manufacturer would go ahead, as it was founded on a contract to supply conservatories to all B&Q's major stores, and units were already in production.

He said the loan was for a substantial sum, adding: "I got my own company to guarantee it, and gave my own personal guarantee, and there is a second charge on the factory here."

Martyn said that paying 2% above base rate for a fixed term meant that unlike an overdraft the loan could not be suddenly called in.

"When I went to sign the papers, they said I'm sorry this 2% has got to go up to 3%'. I said nothing about the project has changed, in fact we have sold £600,000 already, I have got no overdraft, I have taken no money from you, all I am waiting for is lawyers to finish taking the securities so you can release the money, why are you demanding a 50% increase in the interest rate you are charging?"

Martyn continued: "They are getting all this publicity for helping small businesses - we have employed 16 people, have built units, and have financed the whole thing ourselves, all on the understanding we were getting 2% above base. The bank says it is less than we would have been paying in June, but when I signed up in June it was to a variable rate. Then they said we should have signed the agreement in June. I said you never sent us the papers'."

A week ago, launching a commitment to freeze borrowing costs for small business, Peter Ibbetson, chairman of small business at Royal Bank of Scotland, said: "The bank fully recognises that one of the biggest worries facing small businesses is the increase in the cost of borrowing and we believe this move will reassure our customers that the bank is committed to supporting them."

Martyn said: "I told them the only thing that has changed since June is my company has got stronger and your company has got weaker. I am paying an extra 1% because of the mess you are in."

On where the decision had been made, Martyn said: "I was told it had gone right to the top."

The loan, which would have started at 6.5% in June, will now start at 6%, though could be reduced further by this week's rate decision.

But Martyn said: "If base rate has come down by 1.5%, why are they snaffling 1%? They should be passing it on to make the economy run."

A Royal Bank of Scotland spokeswoman said: "Pricing is looked at on an individual case by case basis and takes into account the cost of funds but also the risk involved in any transaction and is priced accordingly."

She said the Libor inter-bank rate was higher now than it was, for instance, in the summer. "We have made a commitment not to increase overdraft pricing for small businesses with effect from December 1, and for our larger commercial and corporate customers our relationship directors will continue to work closely with them to provide the support they need. All facility and pricing discussions, as now, will reflect the discrete and individual circumstances of each customer."

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