Current account balances among small and medium business customers of the two main banks are beginning to improve, with more small firms moving into the black in 2010 compared to last year, according to bankers at AIB and Bank of Ireland.

The improvement in credit balances is a sign that businesses are beginning to experience the positive change in larger economic trends, the bankers said.

"It's a sign that SMEs can meet their debt service and current costs, that their funding is sound and they're building reserves," said Michael Lauhoff, head of small business banking at BoI.

AIB head of customer propositions David Roberts said SME credit balances at the bank were "flat or improving" in 2010.

But SMEs are still reluctant to spend in view of the ongoing economic uncertainty.

"They don't want to invest or spend because they're nervous," said Lauhoff, citing €1bn in unused overdraft facilities among Bank of Ireland customers.

Roberts said overall small businesses were "still bobbling along the bottom" and not keen to borrow for expansion yet.

"One-third of SMEs are under some form of distress and this is where demand for loans is coming from," Roberts said, referring to findings by consultancy Mazars, which found that one-third of loans to SMEs last year – €11bn worth – was non-performing.

Some sectors are showing a "bit of activity", according to Lauhoff. He said healthcare, family-run retail firms and agriculture were showing signs of credit appetite.

"People feel things are turning a bit," he said. "But nobody feels we're out of the woods."

Both AIB and Bank of Ireland are submitting plans to the Department of Finance and the Credit Review Office detailing how they will each lend another €3bn to small businesses this year – slightly more than each bank lent last year.

John Trethowan, appointed by finance minister Brian Lenihan to monitor the banks' SME lending, will be reporting regularly to the department on their progress. His office will also be reviewing appeals by businesses turned down for loans by the banks.

The banks have said they are approving about 80% of loan applications but that demand is very low as additional lending is keeping pace with paydowns. They said there were still signs of stress among borrowers but that the rate of deterioration in loan quality was slowing.