PROVIDENCE –– Most Rhode Island banks have refused to participate in the federal stimulus package’s only new loan program for small businesses, denying interest-free cash to struggling businesses that make up the bulk of the Ocean State’s economy.

The Small Business Administration has pushed for months to entice banks –– some of which received millions of dollars as part of the Troubled Asset Relief Program –– to help distribute $255 million set aside in the $787-billion Recovery Act for a loan program dubbed “America’s Recovery Capital.”

The reluctance of the local banking industry, documented in a series of e-mails released by the federal government, helps explain why just 13 Ocean State businesses have received ARC loans as of last week, among the lowest number in the nation.

Only Hawaii, Delaware and Nevada have seen fewer loans.

“Every time I talk to lenders, we encourage them to look at ARC loans for their individual customers or others,” said Mark Hayward, SBA’s Rhode Island district director, who declined to explain the lack of participation. “That’s really a question you have to ask [the banks]. You present a program. You give them options. Their choice of using it or not using it is an internal decision to the bank.”

Bank officials, according to the e-mails and subsequent interviews, complain of complicated lending standards and a lengthy application process they say isn’t worth their time for relatively small loans, which are capped at $35,000.

As of this week, four Ocean State lending institutions –– Bank Rhode Island, BankNewport, Coastway Community Bank and Westerly Community Credit Union –– have approved ARC loans to 13 Rhode Island businesses such as the Green Grocer of Portsmouth, Wakefield’s Shaggy Chic Pet Boutique and Malco Saw Co. of Cranston, according to data released by the Small Business Administration.

In Maine, for comparison, 58 businesses have been awarded loans from 10 banks. And in Massachusetts, 29 banks have given ARC loans to 52 businesses.

The ARC program is the only interest-free loan offered in the stimulus package for small businesses (generally considered those with fewer than 500 employees). Backed by a 100-percent federal guarantee and no federal fees, loan proceeds are distributed to “viable” businesses over six months, and repayment is deferred for a year after the last disbursement. The Small Business Administration’s Rhode Island office aggressively promoted the program to lenders in the weeks before and after its June inception. When several banks ignored an e-mail survey about participation, assistant district director Marilyn Bogue fired off several specific inquiries:

“No ARC loans were made in RI so far this week that I can see, so it’s slow to take off,” she wrote on June 19 to Phillip Friend, senior vice president of retail lending for Washington Trust. “But from a marketing standpoint, you might want to take the same approach that most everyone else is doing, saying that they’ll consider loans for existing customers only. That way, you at least get to talk to the customer and see if it makes sense for them and you.”

But in the four months since, Washington Trust, like the majority of Rhode Island’s community banks, has not approved a single ARC loan. A Washington Trust spokeswoman last week declined to comment.

Rhode Island’s largest lending institutions, such as Bank of America and Citizens Bank, have avoided the program as well.

“I am getting a lot of complaints that citizens is non responsive on requests for arc from citizens customers,” Hayward wrote in a July 17 e-mail to Gary Heidel, national director for Citizens Bank’s small-business services. “Do you want me to send these people to you?”

Heidel didn’t respond, according to e-mails released by the Small Business Administration in response to an open records request by The Journal. A Citizens Bank spokeswoman didn’t respond Friday to a request for comment.

And while Bank of America officials were first contacted by the SBA four months ago, the company, which has received $45 billion in TARP funding, has yet to decide whether to participate, according to spokesman T.J. Crawford.

“Hopefully we’ll have a decision within the next few weeks,” he said. “We’re trying to determine our best approach to helping small businesses, and the ARC program may or may not be part of that.”

Bank of America, he said, has distributed more than $4 billion to small-business customers in the third quarter of 2009 in other lending and credit programs.

Meanwhile, more than $120 million is still available through the ARC program, according to SBA spokeswoman Joan M. Trudell.

The available funding, however, wasn’t mentioned Friday morning during a meeting of government officials and Rhode Island business owners invited to discuss “what stimulus programs they can apply for … or what services may be available to small business through the stimulus package,” according to an announcement released by the lieutenant governor’s office.

Hayward, among the officials on hand, said he didn’t avoid the issue intentionally.

“I got sidetracked, but it was in my notes along with other issues that I didn’t raise,” he said, noting that he focused instead on another small-business loan program that’s just about out of money.

Indeed, the stimulus package provided $375 million to expand an existing loan program with more traditional interest rates. That program waives federal fees until December and boosts federal guarantees as high as 90 percent, but probably won’t admit new applicants as of Monday.

Since late March, that program has produced 87 loans with 90-percent federal guarantees, totaling $30.8 million, or about $354,000 each, according to Hayward’s office.

East Greenwich’s Independence Bank, which received more than $1 million in TARP funds from the federal government earlier in the year, has approved at least two stimulus-related loans, according to President Robert A. Catanzaro. But his bank has refused to offer the interest-free ARC loans.

“I think it could have been designed better,” Catanzaro said of ARC program, complaining of strict lending standards and red tape. “I think it could have been streamlined. And in my opinion, that’s why not that many lenders are utilizing it.”

speoples@projo.com