NEW YORK ( TheStreet) -- With over $1.5 trillion in free reserves parked with the Federal Reserve, critics have taken issue with the big banks for being gun shy about making loans in the aftermath of the crisis and hoarding cash.

But banks' anemic lending activity in recent quarters has more to do with weak demand for loans than tight credit standards or a reluctance to lend, according to industry analysts.

The large banks are certainly well -capitalized to make loans. Bank of America's ( BAC) loan-to-deposit ratio has dropped to 96% as of March 31, from 109% in March 2007. Over the same period, Wells Fargo's ( WFC)ratio of loans to deposits dropped to 94% from 115%. Citigroup ( C) and JPMorgan Chase ( JPM) might be the worst performers on this regard with their loan to deposit ratios at 77% and 73% respectively.

With that kind of dry powder, banks are under tremendous pressure to increase their lending from regulators that have been urging them to make more loans to shareholders demanding to see revenue growth.

The Fed also continues to maintain an easy money policy that allows banks to borrow at near-zero rates and lend at higher rates, making lending particularly profitable.

But uncertainty about the economy and the uneven recovery in jobs has made consumers and small businesses even with good credit history nervous about borrowing. And for those with underwater mortgages and massive debt, the process of deleveraging is not yet complete.

"I don't believe it when politicians talk about how banks aren't lending and that we are hoarding cash, " said Frank Sorrentino, CEO of North Jersey Community Bank. "Banks don't make money unless they lend. It is not natural for them not to lend. But the number of qualified borrowers has shrunk dramatically. Borrowers out there are not looking for more debt. There is no expansion, no hiring. There is a lack of demand for loans."

Recent data does seem to suggest a greater willingness on part of banks to ease credit terms and make more loans.

According to the Fed's Senior Loan Officer Opinion Survey on Bank Lending Practices in April, banks eased lending standards and terms in the first quarter of 2011, particularly in commercial and industrial lending, which has been among the few categories that has shown modest growth in recent months.

Several large banks eased lending policies on credit card and auto loans. The proportion of banks that reported a greater willingness to make consumer installment loans rose to its highest level since the first half of 1994, according to the survey.

Most bankers who eased terms cited increased competition to lend in the commercial and industrial segment, especially among large banks. That suggests that supply of capital may not really be the issue.

"The competition to make C&I (commercial and industrial) loans contradicts the argument that there is no credit out there, " said Mark Pawlak, market strategist with Keefe Bruyette & Woods. "The way I see it, the lending problem is a demand problem."

Interest rates are low enough to make borrowing attractive for creditworthy customers. The Fed's quarterly survey of Terms of Business Lending shows the average effective rate for commercial loans in early May was 2.61%, down from 2.92% in the year-ago quarter. According to Barclays Capital, the current rate on a 48-month car loan is 5.86%, the lowest level in its 40-year data set, with rates declining for nine straight quarters.

Yet, the loan officer survey shows that while demand from larger firms is definitely on the increase, the number of banks that reported higher demand from smaller outfits was less widespread.

Unlike large firms, small companies cannot access borrowing from the corporate bond market and are more dependent on banks for credit.

North Jersey Community Bank has been pconsistent with their lending terms, says Sorrention. "We don't tighten when things are worse and we don't loosen them when things are better," he said. "We have lowered rates. We have been busy with refinancing activity as clients deleverage their balance sheet. Our borrowers are trying to save money, not take on fresh debt."

Bob Coleman, editor of Coleman Report a trade newsletter for small business bankers, says small businesses often complain about the lack of credit availability, but in reality they aren't even trying to get loans.

"Small businesses see that their sales are turning down, their personal credit scores are low, they have lost their credit card lines and their homes are worth less. They know their loan request is going to be turned down," said Colemnan. "They are retrenching and focusing on day to day operations of the business. They do not want to take on more loans."

To be sure, banks are still stricter with their lending standards than they were during pre-crisis levels. That isn't going away anytime soon, the easy spreads notwithstanding.

"I don't know if the drop in interest rates is enough to make banks change their lending standards," said Pawlak. "Will you have much faith in a bank that says 'Hey, the Fed just lowered 10-year rates by 25 basis points, so I am lending like crazy?'"

Coleman says part of the issue constraining small business lending has been the return to old-fashioned credit norms that focus on parameters like character, credit history and cash flow, rather than collateral. The over-reliance on the value of collateral, after all, was what got banks in trouble in the first place.

Unfortunately for businesses, the recession has left the profit and loss statements of businesses in terrible shape and the weak economic outlook offers little optimism on the cash flow front.

Still, no one is arguing that banks lend in a hurry. "Banks and businesses are both making smarter decisions. The businesses are conserving cash, the banks are making better loans," said Coleman. "I would be reluctant to point the finger at banks for not lending . We do not want banks to make bad loans. "

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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