Government plans to make it easier for foundation trusts to use their property as loan security may open up a market for private sector lending to NHS hospitals, lawyers say.

But the risk of “controversy” if a hospital’s assets were sold off to pay loans may mean that banks’ appetite for lending to foundations will remain low, they caution.

Law firm Beachcroft say planned reforms in the Health and Social Care Bill will remove two of the “major obstacles” which have prevented the development of a “proper lending market” for foundations.

The Bill proposes to remove section 45 of the NHS Act 2006, which prevents foundations from disposing of any “protected property” without the regulator’s approval. At present a foundations assets can be protected if they are involved in the delivery of any NHS services or to any healthcare research or education.

In a related move the bill also proposes to extend to foundations most of the insolvency rules that apply to companies.

Jocelyn Ormond, a corporate partner at Beachcroft, said that could open up a market for lending, but he added: “There remains a risk that the appetite of banks to lend significant amounts to the FT sector will remain low, given the controversy that enforcing their security over FT assets may provoke.”

The market would also be constrained by plans in the bill to “designate” certain services which would restrict the ability to use assets involved in such services as collateral in loans.

Mr Ormond continued: “[The government] mean this to be approached on a service by service basis. The problem is, as a lender wanting to take collateral over a bit of a hospital, if a facility is being used to provide ten different services and one of them is designated, you may hesitate to take collateral on that facility.”