A contraction in lending to small and medium enterprises in favour of households is starting a dangerous trend for the Australian economy, said National Australia Banks' (ASX: NAB) head of business banking Joseph Healy.

According to him, the problem resulted from the introduction of the Basel ll capital rules in 2007 and 2008 which made it "capital attractive" to lend to households.

"There's undoubtedly been a significant growth in the amount of lending to households," Mr Healy told ABC Television's Inside Business.

He said that while the Basel ll laws acknowledge the relative riskiness of lending, an accidental outcome has been a notable transfer to household lending.

"Banks on average can do three to four times more lending per dollar of capital into household and to mortgages versus businesses so household lending became much more attractive for the banks and we therefore saw a significant shift in the allocation of capital towards the household sector," said Mr Healy.

He mentioned that for the interest of the economy, the issue now is assuring that banks do not disregard lending to small businesses.

"We mustn't lose sight of the fact that small businesses are the engine room of the economy, they employ close to seven out of ten working Australians and I believe our future prosperity really depends on having a strong, vibrant small business sector."

According to him, SMEs were voicing their problems about lending and their access to funding.

"The banking system today is not serving their (small business) needs and we need to ask ourselves what is it we need to do and what are the reasons behind this issue," Mr Healy said.

"We have to recognise that it could be an issue in the sense of the appetite of international investors to the amounts of Australian paper or investments they might want to make, particularly given the competing demands of other governments and other banks and other corporations around the world."