Banks warn up to half of ‘bounce back’ borrowers could default
UK banks have reportedly warned that up to half of the government’s “bounce back loans” are unlikely to be repaid.
Senior bankers have estimated between 40 and 50 per cent of the bounce back borrowers could default on the debt, according to a report by the Financial Times.
As businesses brace for a slow economic recovery from the coronavirus crisis, lenders are reportedly lobbying the chancellor to prepare for the collapse of hundreds of thousands of small businesses.
The bounce back loan scheme was introduced by Rishi Sunak after the existing Coronavirus Business Interruption Loan Scheme came under fire for not being accessible by some businesses.
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The new bounce back scheme offers 100 per cent government-backed loans of up to £50,000 to small businesses. As of 24 May, 608,069 small and medium-sized businesses have borrowed more than £18bn. They proved immensely popular with more than 100,000 loans approved in the first day.
The 100 per cent guarantee spares the banks from credit risk, but the FT reported that executives are worried that pursuing small businesses in the wake of the crisis will be a “PR disaster”. The terms of the bounce back loan scheme make it clear that it is the lenders’ responsibility to pursue borrowers should they not repay the loan.
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The Treasury and the British Business Bank have told banks they should use their usual approach to collections on the loan.
The main lenders, RBS, Lloyds, HSBC and Barclays, have told businesses that the money is a loan but nothing is due for the first 12 months with no interest charged in that period.
“Some arrangements will have to be made. A lot of them will be written off or converted into something else,” one bank chairman told the FT.
“In most cases the idea of the government taking equity in these companies is unrealistic — they are simply too small. So the question is what’s going to happen to all of these loans?”
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