The Revenge of the Bounce Back Loan

The Treasury has a problem coming down the tracks.

Whilst the Treasury has implemented swift centralised initiatives with the goal of providing instant liquidity throughout the financial system to firms who have been severely hampered by the lockdown, concerned voices grow louder and louder about the inability of firms to pay back the 100% government backed BBL loans. It is widely expected that second quarter results will reflect a global doubling down of the trends seen in the first. A conundrum that Andrew Hilton, the Director of the Centre for the Study of Financial Innovation, has described in a recent video as ‘glimmers of hope versus the dead weight of unsustainable debt’.

Preeminent figures at the helm of two of the largest lenders participating in the schemes have called on the government to take greater responsibility for the prospect of large-scale defaults on lending administered through government initiatives. Lloyds Chairman Norman Blackwell, a former policy chief to John Major and Margaret Thatcher called upon the government to create a vehicle which would hold the debts from firms unable to repay government backed loans. Blackwell joins Sir Howard Davies, the Chairman of RBS in suggesting that the creation of a fund to pool and hold bad loans to keep them off bank’s balance sheets would be a step in the right direction in preventing a zombie-like financial system for years to come.

A recent Business Banking Resolution Service survey of 500 companies highlighted 56% had utilised a government backed loan initiative. Of those, 43% of companies expected not to be able to pay back the loan. The reasons given were two-fold; simply because they would not be able to pay it back or that they felt that they would not be chased by the government and would be able to get away with it, noting HMRC’s already stretched resource capacity.

The fact that so many businesses openly expected not to pay the government back may be staggering to some, but it highlights the scale of the problem that the financial system in the United Kingdom faces. Figures released by the Treasury shows that as at June 7th, lenders have now backed over 800,000 British businesses, with more than £23.78 billion being distributed to 782,246 businesses through the Bounce Back Loan scheme. However, based on the sample provided by the BBRS – the treasury is looking at £10.23 bn worth of loan defaults from companies who had ‘no intention of paying the full loan back’. This number will increase as all accredited lenders get to grips with the sheer number of applications and smooth out their processes and more bounce back loans are issued. Whilst this remains well short of the total amount paid out by British Banks on the back of the PPI scandal; it is important to note that political capital as well as financial capital has been used as security with the BBL loans and a solution to this should be towards the top of the list of the treasury’s recovery planning ahead of the new year.

The solution will not resemble the light touch due diligence process employed in the assessment of the thousands of companies who have so far accessed the Bounce Back Loans to get money in the bank quickly. Debt recovery is a long, slow and painful process for both the borrower and the lender at the best of times – yet the prospect of toxic debt through government backed schemes is likely to become an increasingly complex tug of war between the government and the accredited lenders who administer the schemes. Whilst the government acts as the guarantor, it remains the incumbent responsibility of the lender to recover in the event of a default is if it were a standard lending facility. Whilst 100% government backed, there is an overhanging concern from lenders that the costs incurred by recovery outweighs the benefits of issuing the loan.

A potential PR disaster awaits lenders if they are forced to recover facilities provided to organisations who have simply been unable to repay the loans with which they tried desperately to keep their businesses going. It will erode the trust and confidence in banks that has slowly been rebuilt since the 2008 crisis – something they will be extremely keen to avoid. The hard fact of the matter is neither the accredited lenders nor the Treasury have the inclination or resource capacity to recover loans en masse through the traditional labour-intensive methods – therefore, an alternative solution must be found that is supportive of small businesses but also ensure taxpayer’s money is recouped as much as possible.

The Treasury and its accredited lenders must work together to create a future solvency model which assesses the viability of a business in an environment which in the short term, rightly or wrongly, prioritises public health over economic necessity. The model must be politically viable, amenable to efficient administration and incorporate the new normal of social distancing.

Further reading/viewing;

The Times, ‘RBS boss sir Howard Davies calls for toxic coronavirus loans fund’

The Telegraph, ‘Lloyds Bank Chairman calls on state to take charge of toxic business loans’ 

Centre for the Study of Financial Innovation, Economic Outlook 10 – ‘Glimmers of Hope’ vs ‘The dead Weight of Unsustainable Debt’ 

Business Banking Resolution, ‘The Impact of Covid-19 Loan Schemes’

HM Treasury, ‘Coronavirus Business Loan Scheme Statistics’