Half of all small firms who applied for funding in the last three months were refused credit by their bank, it emerged today.
A survey found nine out of 10 businesses also believed banks are making it more difficult to access finance.
Irish Small and Medium Business Enterprise (Isme) claimed access to credit is abysmal, with the application process getting longer.
Mark Fielding, chief executive, said: “We must put an end to the fiction that bailed-out Irish banks are functioning properly.
“It is true that the ATM machines are still open but, as for assisting the SME sector to grow, as for playing their part in the economic recovery, the banks are simply the living dead.
“They restrict credit lines, delay decisions, miss deadlines and generally hinder progress, while they themselves are slow to reform, re-educate or restructure.”
More than 900 firms took part in Isme’s quarterly bank watch survey, conducted last week.
Some 92% stated the Government was having either a negative or no impact on SME lending.
Mr Fielding added: “The Government must take immediate action and insist on true, reliable and accurate figures from the banks on the real lending to the SME sector.”
Meanwhile business group Ibec said its latest quarterly sentiment report showed a significant improvement in business confidence following a sharp decline at the end of last year.
It found exporters in particular were confident about the outlook for their business, with 30% planning to hire staff in the next three months.
However its survey of 400 companies revealed the domestic economy remains in paralysis and needs help to return to normal levels of trading.
Fergal O’Brien, Ibec chief economist, said: “Exports continue to drive the recovery and it is crucial that nothing is done to undermine the ability of Irish companies to trade internationally.
“In 2012 efforts must focus on restoring more normal levels of activity in the domestic economy. New thinking from the Government and the troika is needed to stimulate consumer activity and get the domestic economy back on track.”