Vladimir Putin told the heads of Russia's leading banks on Monday to scrap their summer holidays and help overcome the steep recession by lending more - even as the country braces itself for a surge in bad loans.

The prime minister called on state banks to boost lending by up to $16bn (€11.4bn, £9.7bn) in fresh loans to shore up the economy, which has been battered by plunging commodity prices and the lack of international credit and is forecast to contract by 8.5 per cent this year.

"I am asking the heads of financial institutions to control this situation and not to plan any summer holidays until the moment that this has been dealt with as it should," Mr Putin told officials at a government meeting.

VTB, the state-controlled second-biggest lender, said bad loans had already surged three times this year to 6 per cent of the total, and gave warning that it would face losses in 2009.

But Mr Putin told officials that banks needed to lend more to break a cycle of fear that was threatening to paralyse the economy .

"I know the fear . . . about the growth in bad loans. But I suggest that the less lending goes on, the greater the risk is that loans won't be returned, because by ceasing to credit, you are strangling the real sector," the premier said.

Mr Putin was speaking as he signed off on a government order to provide 300bn roubles in additional state guarantees for loans that he said could boost lending, mainly by the top state banks, by up to 500bn roubles ($16bn).

Sergei Ignatyev, the head of the central bank, told Mr Putin over the weekend that June data showed no sign that banks had resumed lending, despite recent interest rate cuts.

The Russian government has already pledged more than 1,000bn roubles to boost the capital of the biggest state banks.

The government is locked in discussions about a new bail-out plan for the banking system that would see the government issue banks with Treasury bills in exchange for preferred shares in order to boost capital.

The plan, which would also allow the banks to exchange the bonds for cash at the central bank in one-year repurchasing operations, was discussed at a meeting of financial experts led by Igor Shuvalov, the first deputy prime minister, last Friday.

But people familiar with the discussions said it was still unclear what would be the possible limit on the volume of bonds to be issued by the government.

The proposal is expected to be discussed in parliament this week.

The central bank has said bad loans could climb as high as 12 per cent of portfolios - a level that would wipe out bank profits. But bankers and analysts have given warning that they could climb past 20 per cent.

Pavel Medvedev, deputy head of the banking committee in parliament, said the government and the central bank were working on measures to "salvage the situation if it really deteriorates". He added: "Nobody really knows how bad it is."

Source: FT