A network of retail bank branches owned by state-backed bank Royal Bank of Scotland PLC (RBS) could be nationalized and used as a small-buiness lending bank to boost the U.K. economy, if RBS can't find a buyer for the branches, the Sunday Times reports without citing sources.

The 316 branches are back on the market nearly two years after Spanish banking giant Banco Santander SA (SAN) agreed to buy them in 2010.

Santander said in October it had pulled out of talks with RBS, citing the difficulty of separating the businesses in a way which would allow the 1.8 million customers affected to be seamlessly transferred to Santander's network.

RBS is required to sell the branches by the European Commission as a condition of its bailout by the U.K. government during the financial crisis. The U.K. government owns roughly 82% of the bank. Its unclear what will happen if RBS isn't able to find a buyer for the branches by the deadline set by the commission for it to have divested them.

People familiar with the matter have previously said Virgin Money and financial-focused private equity group J.C. Flowers & Co. LLC are considering bidding for the branches.

Spokespeople for the U.K. Treasury didn't immediately return a call seeking comment Sunday. A spokesman for RBS declined to comment.

-Write to London bureau at generaldesklondon@dowjones.com