Royal Bank of Scotland Group PLC (RBS) Chief Executive Stephen Hester on Thursday defended his bank's lending record and said RBS shouldn't become a "sponsored arm" of the state whose job is to dole out cheap credit.

In recent months, RBS, which is 82% government owned, has come under criticism for pushing up interest rates on some loans at a time when the U.K.'s base rate remains at historic lows.

"It's not that banks are profiteering--profits at all banks remain below target--it's that banks' costs have risen relative to base rate, too," Hester told the British Chambers of Commerce annual conference. RBS' average lending interest rate to businesses was at 2.9%, he added.

Like other banks, RBS is under political pressure to boost lending to kick-start the U.K.'s sluggish economy. Hester said the problem lies with businesses who don't want to borrow.

The CEO said that RBS' U.K. business customers had GBP30 billion of untapped credit lines. "One of the issues we all have to confront right now is that businesses don't have confidence," Hester said. "And when businesses don't have confidence, they don't invest, they save more, they pay down debt."

Hester added that RBS' independence was key in ensuring lending.

"I don't think RBS should be used as a sponsored arm of the state," he said, adding that the bank shouldn't be used to snuff out competition.

This followed calls by a top U.K politician to split RBS into a vehicle focused on lending to U.K. businesses.

- By Max Colchester, Dow Jones Newswires; +44 (0) 207 842 9295, max.colchester@wsj.com

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