British banks warn that up to half of the £ 18.5 billion in “Bounce back” in loans against coronaviruses are unlikely to be reimbursed and are pressuring the Chancellor to prepare for the collapse of hundreds of thousands of small businesses.
Three senior bankers estimated between 40 percent and 50 percent of 608,000 borrowers who accessed Bounce Loan Program, or BBLS, could potentially default on debt as the prospect of a rapid economic recovery fades.
BBLS emergency facilities are capped at £ 50,000 with a term of up to six years and are backed by a 100% government guarantee on principal and interest.
Although the the guarantee saves banks from credit risk, executives fear that taking hundreds of thousands of small, often family-owned businesses – which have borrowed an average of £ 30,000 each – to court will be logistically impossible and constitute a ‘public relations disaster’.
Under the terms of participation in BBLS it is clarified that banks are responsible for prosecuting defaulting borrowers. The Treasury and the British Business Bank, the government-owned development bank that administers the program, have advised lenders to use their normal approach to collect loans.
The program’s biggest lenders, Lloyds, Royal Bank of Scotland, HSBC and Barclays, have made it clear to borrowers that the money is a loan that will have to be repaid, although there is nothing to pay in the 12 first months and no interest charged. to the borrower during this period.
One executive said about a quarter of loans would not have been made under normal lending practices. However, the Treasury has asked banks not to perform standard credit checks – except for basic viability and fraud screening – to speed up payments and avoid bankruptcy of companies unable to stand the foreclosure.
“Certain arrangements will have to be made. A lot of them will be written off or converted to something else, ”a bank president said. “In most cases, the idea of the government taking stakes in these companies is unrealistic – they are just too small. So the question is, what will happen to all these loans? ”
Former Chancellor Sajid Javid said that while he had no concerns about the stability of the banking system, the sector clearly needed help. “We need them to be able to lend to the recovery,” he told the Financial Times.
“That’s why I think it makes sense to consider a bad-bank type structure,” he added, saying it could be done by removing loans from a bank’s books in exchange for ‘a commitment to continue to lend to support a recovery.
Some Conservative MPs share bankers’ fears and believe the government could not afford the political fallout of shutting down so many small businesses after being sued by the state.
However, Chancellor Rishi Sunak’s allies are frustrated with the approach of the banks, which were initially told that the bounce loans were not amortizable grants.
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A government official said the public would expect banks to try to collect loans and have the added assurance of a 100% guarantee.
Another added that the claim that 50% of bounce loans would not be repaid was too pessimistic. The Office for Budget Responsibility has predicted that only 10% of Covid-19 support loans will deteriorate, but this data relates to the £ 40bn loaned through the four government programs, including those to much higher listed companies. large.
The Treasury said its’ rebound ‘loans had been a success, adding:’ We have always been clear that these are government guaranteed repayable loans, not grants, and that the approvals are a decision of the lenders.
“Loans won’t be the right answer for all businesses – and our diverse set of support also includes over £ 9.5bn in grants to three-quarters of a million businesses, paying the salaries of millions of employees. on leave, deferring tax bills and shutting down rates. “