Government fears Bounce Back loan losses could be £23bn
The UK government fears its could lose as much as £23bn ($30bn) on Bounce Back loans handed to small businesses to help them survive the COVID-19 crisis.
The Department for Business, Energy, and Industrial Strategy
(BEIS) said in its annual report, published late on Wednesday, that loss rates
on the coronavirus loan programme could be between 35% and 60%.
At the top end of its forecast, that would leave the
government with losses of £22.8bn of its current £38bn loan book.
BEIS said the estimate was “based on historic losses
observed in prior programmes which most closely resemble the current COVID-19
interventions.”
“However, no two programmes (or two economic downturns) are
completely alike and the estimate will be revised as more data becomes
available,” officials wrote in the annual report. “Actual losses could be
significantly different to forecast losses.”
The department is currently working on a more tailored model
to forecast losses, according to the report.
The estimates are more pessimistic than private sector
forecasts. A coalition of banks and financial firms said in July that it around
a third of Bounce Back loans were expected to default.
Bounce Back loans were announced by chancellor Rishi Sunak
in May as a method of getting cash quickly to small businesses who struggling
as a result of the COVID-19 shutdown.
Unlike previously announced support schemes, Bounce Back
loans do not carry affordability checks and require only anti-fraud and money
laundering checks. Over 1.2 million businesses have so far borrowed £38bn
through the programme. The cash has been lent by commercial banks but carries a
100% guarantee from the government, meaning taxpayers will be on the hook for
any losses.
While the Bounce Back scheme has been successful in pushing
cash to businesses quickly, the minimal checks carry significant drawbacks. A
letter published this week shows that the head of the British Business Bank,
which helps run the scheme, raised concerns with business minister Alok Sharma
in May about potentially high loss rates and the “very high” risk of fraud.
Projected losses on the Bounce Back scheme are much higher
than for other COVID-19 support programmes. BEIS said in its annual report that
losses on the coronavirus business interruption loan scheme (CBILS) are likely
to be between 10-25%. Losses on the coronavirus large business interruption
loan scheme (CLBILS) are forecast to be between 5-20%.
Both CBILS and CLBILS carry more stringent lending checks
and only enjoy a 80% government guarantee. £19.2bn has been lent under both
schemes.
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