LONDON - NBNK Investments PLC Thursday made a sweetened offer for 632 branches belonging to Lloyds Banking Group PLC, as the investment vehicle ups the ante on its bid to create a challenger bank in the U.K.

Lloyds is currently in exclusive negotiations to sell the branches to the Co-Operative Group. However, the deal has been hindered by regulatory issues, sparking fears that it might collapse.

NBNK, an investment vehicle created by a cohort of financial heavyweights to make acquisitions in the U.K. domestic banking and wealth-management sector, made its new offer public as it looks to woo Lloyds away from the stuttering Co-Op negotiations.

NBNK, which previously had a GBP1.5 billion ($2.4 billion) offer for the branches rejected, is now pledging to underwrite the demerger of the branches and hand cash and or shares to Lloyds shareholders directly. The revised bid would increase to between GBP1.5 billion and GBP2 billion ($3.2 billion), a person familiar with the matter said.

Lloyds, which is 40% owned by the government, has to sell the branches on condition of receiving state aid when it was bailed out by the U.K. government in 2008. But the sale, code-named Verde, has been dogged by regulatory issues related to the experience of the Co-Op's board and the amount of capital the banking-to-funerals group would have to hold if it boosted its banking business.

NBNK said that it was well-suited to take over the branches as it had an experienced board and a "best in class" technology platform. the investment vehicle also pledged not to cut any jobs at the 632 branches.

"Our objective is to create a new, large challenger bank and brand that will shake-up U.K. high-street banking, operating in the interests of customers," NBNK Chief Executive Gary Hoffman said. "I believe we have tabled a compelling proposition that will invigorate competition, provide jobs and is the right solution for taxpayers."

A spokesman for the Co-op declined to comment.

A Lloyds spokesperson wasn't immediately available to comment. Lloyds previously confirmed that a flotation of the 630 branches remains an option and that an update on the sale would be made in the second quarter.

The sale of the branches was heralded by the British government as a way to boost competition in the U.K. banking sector. However, the creation of the much-trumpeted "challenger bank" has yet to materialize.

The combination of stringent regulation, bleak macro-economic outlook and the presence of five established banks has dulled interest in the U.K. retail banking market, analysts say.

The 630 branches make up 4.6% of the U.K.'s checking account market, below the 6% threshold that the U.K.'s Independent Commission on Banking says a standalone bank needs to achieve in order to be competitive.

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