The Treasury is in talks with the UK’s largest banks over an industry-wide plan to help deal with the tens of billions of pounds of bad debt expected under the loan scheme government ‘rebound’ against coronaviruses.
Over a million of the UK’s smallest businesses borrowed £ 33 billion in just two months under the rebound loan program (BBLS), which offers six-year state-guaranteed facilities of up to £ 50,000 with only minimal checks on the borrower’s ability to repay.
The program was designed by the Treasury to allow banks to lend quickly to businesses struggling to survive the foreclosure, but bankers and officials predict many loans will never be repaid.
The Office for Budget Responsibility said this month that up to 40% of these loans could by default, with £ 53bn expected to be on loan over the program’s six-month period. Based on the loss per defaulted loan assumptions, this would cost the taxpayer £ 16bn.
One option discussed by officials and bankers is whether problematic loans could be extended for up to a decade to give distressed borrowers more time to repay. But banks are strongly pushing back long extensions, wary of increased work and risk.
Part of the talks revolve around a common code of conduct for dealing with bouncing borrowers, according to three people familiar with the talks, which 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 terms, they added.
Latest Coronavirus News
Follow FT’s live coverage and analysis of the global pandemic and the rapidly evolving economic crisis here.
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 isolate bankers from a “Public relations disaster” if they have to sue thousands of small businesses that are struggling to repay.
Bankers argue that with the influx of new borrowers and the unprecedented type of debt on offer, this would be impossible without the hiring of hundreds of restructuring and collection specialists, which they cannot afford. with income squeezed by ultra-low interest rates and tens of billions in the allowance for loan losses that accumulate.
Chancellor Rishi Sunak has already categorically ruled out the idea of state bailouts, saying that converting defaulted debt into equity stakes in bankrupt companies is not something the government should take on. habit “of doing.
To introduce an automated system for BBLS, the rules of the Financial Conduct Authority 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 banks to remain the primary relationship with the borrower, said a person familiar with the talks, rather than adopting a more centralized approach such as a government-led “bad bank” to take over the bank. problematic debt.
Bounce 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 suggests the government will come up with more generous repayment terms for loans – or consider writing them off as grants – it will likely lead to even more loans opportunistically, according to people close to the chancellor.
As a result, the government told bankers it did not want to take a public position on the issue, they said.
But a senior British banker said: “We have told the government it needs to automate and set the rules. We need them to come out and say very, very soon how they’re going to behave on their warranty. “
“If I get a fault all I want to do is submit it to the government and not kick the client out myself,” the person added. “It’s their money after all, they told us to lend it out without doing the normal checks.”