Nearly two thirds of Bounce Back Loans, designed to help small businesses survive Covid-19, may never be repaid, says the government.
If so, that could mean the taxpayer having to find over £20bn to cover small business loans which have defaulted.
The Bounce Back Loan Scheme (BBLS) provides private sector lenders with a 100-per-cent state guarantee on low-interest loans to small companies. It has underwritten £38bn of credit to 1.3 million companies to date.
Overall, the taxpayer faces losses of as much as £23bn so far in bad loans across all the state coronavirus emergency bailout schemes.
Vulnerable to abuse
Yesterday, it emerged that ex-British Business Bank (BBB) CEO Keith Morgan wrote to business secretary Alok Sharma in May, warning that the schemes risked wasting taxpayers money.
Mr Morgan said: “The scheme is vulnerable to abuse by individuals and by participants in organised crime.”
A draft review by PwC had classified the risk of fraud as “very high”, he added.
The BBB, which administers many of the government’s economic interventions, issued formal “reservation notices” outlining serious concerns about the BBLS and Future Fund ahead of their launch.
In a formal notice of the BBB’s concerns about the BBLS, Mr Morgan said the imposition of a uniform 2.5pc interest rate for all Bounce Back Loans could reinforce the dominance of big banks because smaller competitors would be unable to compete.
Caroline Plumb, founder of small business loans fintech Fluidly, said: “The lack of credit checks, liability and an unmatchable interest rate for businesses accessing the Bounce Back Loan Scheme essentially made it free money … personally, I wouldn’t have extended the deadline for applying for a BBLS loan without addressing eligibility criteria. It only compounds a well-intended but flawed solution.”
Separately, Mr Morgan also questioned whether the Future Fund, which has provided £720m through 711 loans, would offer “value for money”.
Mr Morgan wrote that the better companies would be less likely to use the Future Fund, as they would already have found investors.
“This will result in [the government] investment going to the second tier of companies, which will likely result in higher associated loss rates,” said Mr Morgan.