Up to £5bn of emergency business pandemic loans will never be repaid

Experts have assessed that £5 billion of state-backed government Covid-19 emergency loans are at risk of not being repaid, far less than feared due to the strong economic recovery.

Analysis has suggested that between 5% and 10% of SME businesses that have used the government’s £47.4 billion emergency loans support scheme have missed repayments. although initial data has suggested that defaults would be much lower than feared.

The prediction is based on the first few months of debt servicing and has also been helped with stronger than expected economic recovery from the pandemic.

Late last year the Office for Budget Responsibility (OBR) estimated that the guarantees behind the bounce back loans could cost the taxpayer as much as £19 billion. Under the loan scheme banks could offer state-guaranteed loans of up to £50,000. This leaves the taxpayer having to cover all losses.

If the business cannot repay then the lender would look to trigger the state guarantee. Companies were able to access the bounce back loans programme through a streamlined application process that came with only limited checks as it was designed to get funds as quickly as possible to businesses in trouble. This led to the large initial estimates of potential losses to the taxpayer. Bankers say default estimates for other emergency coronavirus loan schemes that came with more stringent checks were much lower. They estimate that the exposure to bad loans for the coronavirus business interruption loan scheme aimed at larger SMEs was less than 1 per cent.

Commenting on the analysis, Simon Fry, Partner at ReSolve said “We would not be too quick and attribute it to the sudden economic turnaround or overall confidence but instead give the credit to the government for its overwhelming support to UK businesses, especially SMEs. The support is slowly coming to an end but the moratorium on commercial evictions and winding up petitions are still in play as is the furlough scheme. These all play a big part in companies having the resources-both financial and otherwise to focus on building back their business and servicing their debt.”

“What will be key in telling us if the default rate will continue to stay low is how companies prepare for when the government fully support stops.”
The respective figures for the self-employment income support scheme were 1.8 per cent and 0.7 per cent.

On last year’s Eat Out to Help Out, which subsidised meals to encourage people back to restaurants as they reopened after the first Covid-19 lockdown, 6.3 per cent is thought to have been misappropriated by opportunistic criminals, with 0.6 per cent lost to criminal gangs.

Pinsent Masons said HMRC’s estimates meant close to £350 million may have been stolen from the three schemes by organised criminals.

HMRC’s estimates covered only the 2020-21 financial year, which Pinsent Masons used to estimate the total lost to fraud on the schemes.