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The coronavirus support program for small businesses is expected to lead to widespread defaults, senior bankers and business advisers say, costing taxpayers hundreds of millions of pounds.
The government-guaranteed Bounce Back Loan Program (BBLS) has proven to be hugely popular, with £ 2 billion distributed last Monday, the first day of the program. Most participating banks have refused to update figures since then, but the sharp rise continued into the first week, with Barclays and RBS approving a total of £ 3.7bn in loans on Thursday morning .
Unlike the previous Coronavirus Business Interruption Loan (CBILS) program, the BBLS comes with a 100% government guarantee, making it easier for 14 participating banks to approve applications.
But the higher turnout and looser rules make an increase in defaults inevitable, with at least a fifth of loans unlikely to be repaid, according to Blick Rothenberg, a tax and advisory firm.
Bank executives are bracing for a wave of defaults next year. Business groups work together to make sure the public is aware of the risks of borrowing money, even at low interest rates.
A senior banker said the industry feared there were “hundreds of thousands” of companies complaining to the financial mediator that they mis-sold the loans when they could not repay.
“It’s a gamble for the government, which effectively assumes that these companies will be able to recover on the basis of their past performance and repay the loans on future profits and cash flows. The taxpayer is now taking out millions of pounds in unqualified loans, ”said Richard Churchill, partner at Blick Rothenberg.
But a government official said without the program thousands of small businesses would have fallen into the wall as a result of the lockdown. “A lot of people, by definition, can’t pay it back. . .[but]the objectives of the policy outweigh the risks.
Loans of up to £ 50,000 carry a fixed interest rate of 2.5%, which is paid by the state in the first year. Full collateral in the event of default means that banks do not need to assess the future viability of borrowers. Although the scheme requires lenders to sue defaulters before calling on government guarantee.
In contrast, CBILS comes with an 80 percent government guarantee and a requirement that banks test future viability. Surveys by UK Chambers of Commerce have found that banks reject at least 40 percent of CBILS applicants.
BBLS was designed to help small businesses that are struggling to access state support with any qualifying business founded before March 1, 2020.
Matt Hammerstein, managing director of Barclays, told the Commons Treasury select committee this week that the bank had “no firm expectations on default rates,” adding that the biggest problem facing companies was “the how consumers react to release from lockdown. “
Mark Hart, Deputy Director of Company Research Center, warned that new small businesses were prone to failure. During the last recession, 26% of those created in 2009 ceased their activities in two years and 51% in four years.
“It is not unreasonable to assume that a significant proportion of these loans will never be repaid if the recipient profile is skewed in favor of younger companies,” said Professor Hart.