Defaults on bounce back loans may reach £26bn

Overall it is estimated that up to £48bn could end up being lent under the scheme by 4 November 2020, substantially more than was expected.

The scheme provides businesses with 100% government-backed finance worth up to £50,000. These loans do not have to be paid off for 10 years and offer a range of flexible payment options.

The £26bn default figure is based on the scheme having lent £43bn and analysis of credit and fraud risks across bounce back loans, however the government spending watchdog stresses the estimate of 35% to 60% defaults is “highly uncertain”.

This is because the real extent of credit losses and fraudulent losses may not become fully apparent until repayments are due on these loans (from 4 May 2021 as the government is paying interest on all loans for the first year).

Losses may also widen depending on the UK’s economic performance, with latest estimates from the British Business Bank and Office for Budget Responsibility widening the default range to between 15% and 80% of bounce back loans.

In presenting its findings, the NAO points to the speed of the scheme rollout as the root cause of these issued: “Once government decided to support small businesses facing cash flow problems owing to the pandemic, it moved very quickly to set up a scheme. It prioritised one aspect of value for money – payment speed – over almost all others and has been prepared to tolerate a potentially very high level of losses as a result.”

Regarding debt recovery of defaulted loans, the NAO has indicated the nature of bounce back loans may make this more difficult as the Treasury has not yet finalised how lenders should collect overdue repayments.

At the moment the loan’s terms give lenders a 12-month time limit after they have issued a formal demand on the borrower to pursue outstanding amounts.

However, the Treasury has not given guidance for lenders for the process, once this time passe, and currently only a principles-level guide to recovery has been agreed.

The Treasury and the British Business Bank are expecting to produce specific operational details by winter 2020/21. This will allow lenders to put these into operation with borrowers ahead of the first repayments due on loans.