Banks will be pushed into foreclosing on small businesses unable to repay Covid debt, a City insider has warned.
This is because foreclosing on SMEs unable to repay emergency coronavirus loans will be the only way banks can trigger the government’s guarantee to repay bad Covid debt. Banks would have to prove a loss before they can claim on the guarantee.
The government’s lending schemes have provided nearly £53bn to some 1.2m companies, including £35.5bn worth of bounce back loans — which include a 100 per cent guarantee for small business loans – and £13.7bn through the coronavirus business interruption loan scheme (CBILS).
The Office for Budget Responsibility has warned that in a worst-case scenario, £35bn of the Covid debt will never be repaid. The banks themselves believe that up to half of bounce back loans alone will never be repaid.
A Business Banking Resolution Service survey in May discovered that nearly half of small businesses that have taken out government emergency coronavirus loans do not intend to repay them.
The Treasury has turned a deaf ear to a City of London push for it to set up a bad COVID-19 debt bank, an idea proposed by Lord O’Neill and others.
The Recapitalisation Group, led by trade body TheCityUK, has lobbied for the government to create a new state agency, The UK Recovery Corporation, to handle the coming tsunami of bad Covid debt, accumulated by small businesses through state-backed loan schemes.
“The do not want this debt on their books or to have to chase the money,” one City insider told the Financial Times.
There have also been grumbles that the government will do all it can to wriggle out of its guarantees once the rubber hits the road, and small businesses default on Bounce Back Loan and Coronavirus Business Interruption Loan repayments next spring, when they start having to repay them.