Metro Bank has clinched the biggest award to date from a £775m scheme meant to boost competition in the banking sector, despite the revelation of a major accounting blunder at the high street lender last month.

The independent Banking Competition Remedies body awarded the first tranche of cash to Metro Bank, Starling Bank and Clear Bank – with Metro securing the largest pot of £120m. The others will take home £100m and £60m, respectively.

The other applicants – CYBG, TSB and Co-operative Bank – failed to win any of the three grants. However, they will have a chance to apply for second, but smaller, pool of funds, the largest of which is worth £50m.

The top award to Metro Bank comes despite it suffering a share price fall of almost 40% in a single day last month after it revealed problems with how they classified loans. Metro Bank’s chief executive, Craig Donaldson faced criticism after not initially admitting that the error was found by the Bank of England.

Metro Bank committed to matching the award with £240m of its own investment and opening another 30 branches in the north of the UK. Starling said it will launch an online portal for business customers alongside its mobile app-based bank, while ClearBank will partner with the Tide digital banking brand to allow company registration alongside opening a current account.

The cash awards are part of a £775m fund, bankrolled by Royal Bank of Scotland as part of conditions attached to the £45bn government bailout – which amounted to state aid – during the 2008 financial crisis.

The so-called alternative remedies package replaced plans for RBS to sell off a portion of its SME banking business, meant to be launched as a standalone bank known as Williams & Glyn. However, plans to spin off or sell that bank fell through.

The resulting funds have been divvied up into two pots. They include a £425m capability and innovation fund, meant to help challenger banks develop their current account, lending and payments offerings for business customers. The awards were administered by Banking Competition Remedies Ltd, a body established to be independent of RBS and the government.

The other is a £350m incentivised switching scheme, aimed at getting up to 200,000 RBS and NatWest business banking clients to switch their accounts to other banks through preferential terms like free banking or a cash offers.

Nine challenger banks will participate in the scheme, starting from 25 February, including: TSB, Co-operative Bank, Starling, Santander UK, Metro Bank, Handelsbanken, CYBG, Hampden & Co, and Arbuthnot Latham.