More than one million of the UK’s smallest businesses have borrowed £ 33 billion in just two months under the Bounce Loan Program (BBLS), which offers six-year government-guaranteed facilities ranging up to £ 50,000 with minimal checks on the borrower’s ability to repay.
The system was designed by the Treasury to allow banks to lend quickly to businesses struggling to survive the foreclosure, but bankers and officials predict that many loans will never be repaid.
The Office of Fiscal Responsibility said this month that up to 40% of those loans could be in arrears with £ 53bn expected to be loaned in the six months the program will operate. Based on the loan default loss assumptions, this would cost the taxpayer £ 16 billion.
One option discussed by officials and bankers is whether problematic loans could be extended for up to a decade to give troubled borrowers more time to repay. But banks strongly push back long extensions, wary of work and increased risks.
Part of the talks revolve around a common code of conduct to deal with rebounding borrowers, according to three people familiar with the talks, who could provide terms of reference on how to deal with those struggling to repay. This could include advice on when and how to automatically extend conditions, they added.
Bankers are also discussing a standardized and automated approach to dealing with defaults, with measures to help borrowers be deployed to all lenders to ensure consistency and efficiency. Such a system would protect bankers from a “public relations disaster” if they have to sue thousands of small businesses that are struggling to pay back.
Bankers say that with the influx of new borrowers and the unprecedented type of debt on offer, this would be impossible without hiring hundreds of restructuring and collection specialists, which they cannot afford on limited income. by extremely low interest rates and tens of billions of dollars loan loss provisions are piling up.
Chancellor Rishi Sunak has already categorically ruled out the idea of a state bailout, saying that converting defaulted debt into equity stakes in failed companies is not something the government should take “on.” habit ‘of doing.
To introduce an automated system for BBLS, the Authority’s rules of financial conduct should be temporarily or selectively relaxed. Executives are also worried about future accusations they mis-sold loans to companies they knew were unlikely to repay.
Treasury officials also want to avoid the kind of banking scandal that resulted from the latest financial crash, said a person familiar with the talks, who said a government-approved approach could help.
The Treasury declined to comment.
Another debated issue is that banks must first attempt to recover money from defaulting lenders before they can trigger the government guarantee.
The Treasury wants the banks to remain the primary relationship with the borrower, said a person familiar with the negotiations, rather than taking a more centralized approach such as a government-led “bad bank” to take over the bank. problematic debt.
The rebound loans will continue to be issued until Nov. 4 – although the Treasury may extend the program – and there is no interest payable on the loans for one year. The problem, however, accumulates as the volume of loans increases.
Mr Sunak is concerned that if he gives any idea that the government will come up with more generous repayment terms for the loans – or consider writing them off as grants – it will likely result in the opportunistic underwriting of even more loans, according to Mr. Sunak. people close to the Chancellor.
The government told bankers as a result that it did not want to take a public stand on the issue, they said.
But a senior UK banker said: ‘We have told the government it needs to automate and set rules. We need them to come forward and say very, very quickly how they’re going to behave with their guarantee. ”
“If I do get a defect, all I want to do is submit it to the government, not kick the client out myself,” the person added. “It’s their money after all, they told us to lend it out without writing the normal checks.”