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Business volumes have also continued to fall at a sharp pace.

The latest Financial Services Survey from the CBI and PricewaterhouseCoopers LLP also revealed that these firms expect to find it significantly more expensive to access finance for investment purposes, and that they fear the credit squeeze will get worse over the coming six months.

Volumes worse than expected 

Business volumes fell sharply, as 17 per cent of respondents said volumes had grown in the three months to early March, while 47 per cent said they had decreased.

The resulting balance of -30 per cent followed December's near 17-year low of -33 per cent, and was worse than expected. A similar rate of decline is expected over the coming three months.

A record balance of respondents (-44 per cent) reported a fall in the value of fees, commissions and premiums, while income from net interest, investment and trading also fell sharply again.

Both of these income categories are expected to fall heavily again over the next three months.

Profitability is expected to stabilise 

Total operating costs (excluding the cost of funds) grew, although this was at a slower rate than the previous four surveys and they are expected to be flat over the next three months.

Average operating costs per transaction fell back slightly, after growing at the fastest rate in 17 years in the last survey, and this measure is expected to fall markedly over the coming quarter.

The sector's profitability has dipped sharply, after holding up last quarter. The balance of 18 per cent reporting a fall was a weaker figure than expected and the most negative since March 2003 (-19 per cent).

On a more positive note, profitability is expected to stabilise in the coming three months.

A net 25 per cent of respondents said they had cut jobs over the past three months, which is the highest rate since March 2003 and against expectations that numbers employed would increase marginally.

Firms' expectations for employment over the next few months (a balance of 33 per cent expecting numbers employed to reduce) were the weakest since December 2002.

Lending to private individuals fell sharply 

Plans for capital investment in the year ahead are very weak, with plans for spending on IT flat, and intentions for land and buildings, and vehicles, plant and machinery the lowest since June 1992. Marketing expenditure plans, however, have picked up.

Trends in patterns of lending to different types of borrower illustrate the way in which the credit squeeze is feeding through.

The amount of lending to private individuals fell sharply again in the three months to March, and the balance of -28 per cent reporting a decline was the weakest since March 1991 (-45 per cent).

Lending to industrial and commercial companies continued to increase, however, at a slightly faster rate than recorded in December.

A balance of 8 per cent nevertheless expects lending to these customers to contract in the next three months, while lending to other domestic customer bases is also expected to decline.

As financial institutions adapt to the credit squeeze, average spreads, which measure the difference between the rates at which money is borrowed and lent, were felt to have widened strongly (a balance of +35 per cent).

This was the largest gap since March 1993 (+48 per cent). The value of non-performing loans, or bad debt, rose very slightly but is expected to grow faster next quarter.

Ability to raise funds 

Even more firms think the credit squeeze will be prolonged than did so three months ago - 90 per cent believe it will last longer than six months compared with 70 per cent last quarter, despite firms being a further 3 months into its effects.

Nearly all businesses (97 per cent) believe there is a good chance that credit conditions will get worse over the next six months - 35 per cent said it was a 'high' likelihood and 62 per cent saying it was 'medium'.

The growing impact of the credit squeeze is also evident in the proportion of firms saying their ability to raise funds will be a constraint on business growth in the coming 12 months.

Forty per cent of firms saying this would be the case, up from 24 per cent last quarter, is the second consecutive record figure reported.

This is largely due to the record proportion of banks expressing concern that fund-raising ability will constrain expansion - this quarter's 66 per cent set a new high, after a record 36 per cent last quarter.

The proportion of building societies concerned about this was also very high (83 per cent).

Business sentiment among financial services firms has continued to worsen, and a balance of 29 per cent reported that they are less optimistic about the overall business situation in their sector than they were in December.