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* Funding Circle will also refer customers to Santander
* UK government considering asking other banks to follow
By Matt Scuffham
LONDON, June 18 (Reuters) - Santander UK will become the first British bank to refer rejected applicants for loans to an alternative finance provider, a move its rivals could be forced to follow as Britain looks to boost lending to small businesses.
Britain's biggest banks have been accused of failing to provide sufficient credit to small and medium-sized enterprises (SMEs) and the government is considering making it compulsory for them to direct failed loan applicants to alternative institutions, such as peer-to-peer lenders.
Santander said on Wednesday it would refer some of its SME customers to Funding Circle, one of Britain's biggest online lending platforms, in cases where it believed the peer-to-peer lender was "better placed to help".
"Santander's partnership with Funding Circle is a good example of how traditional, and alternative finance can work together to help the nation's SMEs prosper," said Santander UK's Chief Executive Ana Botin.
Peer-to-peer loans allow investors to lend directly to individuals and businesses via low-cost online platforms.
Funding Circle's founder Samir Desai said Santander had "created a blueprint for other banks to follow".
As part of the agreement, Funding Circle said it would direct SMEs to Santander when they required day-to-day relationship banking or other services such as international banking and cash management.
Funding Circle has helped over 5,000 firms borrow more than 290 million pounds ($492 million) since its launch in 2010. Its investors include thousands of private individuals, the government-backed British Business Bank, and local councils. It lends businesses between 5,000 pounds and 1 million pounds and offers investors an average net return of 6.1 percent.
$1 = 0.5893 British Pounds Reporting by Matt Scuffham; Editing by Mark Potter