THE Co-operative Bank has confirmed that it will bid for a slice of the Royal Bank of Scotland's £775 million fund which is aimed at increasing competition in Britain's banking sector.

The lender, which is challenging high street stalwarts for a share of the retail banking market, will initially target grants worth up to £120m to develop its business current accounts.

It is aiming to expand its current account and lending services for small companies that have turnover below £2m and for "ethically minded SMEs who are looking for different choice".

Co-op Bank will also apply for the £350m incentivised switching scheme part of the fund that aims to encourage small business customers to ditch their RBS account for rival banks.

The bank already has more than 90,000 small business customers, representing 2% of the small business current account market.

Other challenger banks such as Starling, CYBG and Metro Bank as well as Nationwide Building Society have said they will bid for the fund.

RBS's alternative remedies fund is part of conditions attached to its £45 billion Government bailout at the height of the financial crisis and the cash will be distributed by the Banking Competition Remedies body.

Winners of the first round of financial awards are expected to be announced in February.

Last year, the Co-op Bank reached a £700m deal with hedge funds which saved the troubled lender from a potential collapse.

The rescue deal saw the bank effectively sever its historic relationship with the Co-operative Group and separate itself from the wider mutual's pension scheme.

However, the company is on the road to recovery after it recently posted a narrowed loss for the first nine months of the year.

Chief executive Andrew Bester, who joined the firm earlier this year, said: "The Co-operative Bank is now in a position to put the issues of the past behind it and to once again play an important role in bringing more competition to the market - and this is no more needed than in the business banking market where five providers hold 85%.

"We are a different type of challenger, bringing both a heritage of already serving small and medium-sized businesses well with the advantage of a strong and distinct brand.

"We would look to utilise both of these to increase competition and to build on the services we offer, reaching out to the significant number of owner-managed businesses, tradespeople and social or charitable-led organisations that are underserved and need our support."