The National Audit Office (NAO) revealed that the two banks, which have been the main beneficiaries of taxpayer bailouts in the UK, are not providing enough finance to businesses operating in the country.
But RBS and Lloyds are reaching retail mortgage lending targets, the report said.
Last month, the government purchased an additional $65 billion of shares in the two banks, following on from a previous $62 billion investment in the financial institutions.
Amyas Morse, head of the NAO, said it was vital the eventual sale of government assets in Lloyds and RBS was managed correctly.
"When it comes to selling its stakes in the banks, the government has to be mindful of the proceeds for the taxpayer but also of the implications for competition in the UK market," he stated.
Earlier this week, the RBS board of directors were the subject of derision from politicians after they threatened to resign in protest at potential bonus curbs.
By Claire Archer