LONDON (Reuters) - The British government said yesterday it had signed a deal with Royal Bank of Scotland and its Natwest unit to increase loans to business under its £10 billion ($14.7 billion) working capital scheme.

Business Minister Ian Pearson said in a statement that talks with two other unnamed banks to participate in the scheme were at an advanced stage.

A spokesman for Pearson's department said the government hoped to reach further agreements shortly.

"RBS and Natwest have agreed that the capital released by their participation in the scheme will be redeployed in support of lending to creditworthy small and medium-sized enterprises and mid-corporates," Pearson said.

"This forms part of the £16 billion ($23.5 billion) of additional lending to businesses they committed to on February 26."

The spokesman declined to say how much the agreement announced yesterday covered, citing commercial confidentiality, but Prime Minister Gordon Brown told parliament on Wednesday that £1 billion ($1.5 billion) had been agreed under the scheme.

The working capital scheme was set up in January to help small and medium-sized businesses refinance debt under a plan to stop cash-starved firms going bust in the country's first recession in almost two decades.

The government will cover £10 billion of the risk on companies' day-to-day needs for firms with turnover of up to half a billion pounds. Pearson said the scheme, which runs for two years, had been given EU state aid approval on March 24, and the banks had agreed to the deal on Tuesday.

The Federation of Small Businesses (FSB) said the banks no longer had any excuse to refuse loans.

"We hope that bank managers will embody the spirit of the working capital scheme and become more amenable to approaches from small businesses, which are still struggling to access finance," said FSB chairman, John Wright.