The UK government has reduced the guarantees on nearly £1 billion billion in bank loans provided to struggling businesses during the COVID-19 pandemic. As a result, creditors will now bear the burden of some of these loans that are unlikely to be repaid.
Newly revealed data, obtained by Reuters through a Freedom of Information (FOI) request, indicates that the British Business Bank (BBB), a state-owned entity overseeing these loan schemes, has withdrawn state guarantees from 10,786 loans worth a total of £979 million, starting from October 11. This move is aimed at reducing potential losses to the taxpayer.
While the current amount withdrawn is only a fraction of the £77 billion in loans issued, it comes in response to pressure from lawmakers and the British government spending watchdog, who criticized the programs for being too lenient. These figures may increase further, as the latest data shows that only £17 billion had been fully repaid by borrowers as of June 30.
Numerous lenders participated in these government-backed programs, including the UK’s “Big Four” banks: Barclays, NatWest, Lloyds, and HSBC. Barclays and HSBC declined to comment, while the other two were not immediately reachable.
The emergency credit programs in the UK mirror similar government funding initiatives developed worldwide to support businesses during extended lockdowns. However, it is only now becoming clear what the full costs are and who will ultimately bear the financial burden.
Government officials have increased their oversight of the schemes to ensure they provide better value for taxpayers, especially as they grapple with strained public finances in the lead-up to a significant budget update later in the month.
A spokesperson for the UK Department of Commerce emphasized their commitment to supporting the country during unprecedented times and noted that they work with lenders to remove guarantees when necessary to protect taxpayers’ money.
The UK Finance, a bank lobby group, mentioned that lenders are in regular communication with the BBB, and some loans are being repaid from the guarantee at the lenders’ discretion.
Lenders responded to the government’s call to continue providing credit to the UK economy through three key arrangements in 2020. The most significant and controversial of these was the “Bounce Back Loan” (BBL) scheme, which generated £47 billion and was specifically designed to assist the UK’s smallest companies in staying afloat.
Participants were required to streamline their standard credit checks, enabling them to borrow up to £50,000 within hours of applying. Under the terms of BBL, the government assumed 100% of the credit risk.
However, according to the FOI response, some lenders discovered that they could not claim the guarantee. In such cases, any financial losses are borne entirely by the lender, as confirmed by the BBB.
The guarantees were revoked for various reasons, including data corrections, application errors leading to “double” funding for companies, and breaches of regulatory rules, according to the BBB. These breaches might indicate poor treatment of borrowers, according to one source. While the BBB has the authority to compensate lenders for future claims due to repeated violations, it has not yet exercised this authority, the source added.
According to the FOI response, lenders themselves identified errors or did so after consulting with the BBB. All lenders who participated in the emergency credit schemes are subject to at least one audit, according to the BBB.
Reuters requested a breakdown of the removal of state guarantees by lender, but the BBB refused, citing potential harm to their commercial interests. The lenders were asked for their opinion on potential disclosure and reportedly agreed to it, according to the BBB.
These loan programs have been embroiled in controversy as evidence of widespread fraud has emerged. A deputy minister, Theodore Agnew, resigned in protest last year, claiming that efforts to prevent fraudulent abuse were inadequate.
The most recent data on the schemes, published in September, showed that the value of suspected fraud across all schemes reached £1.7 billion as of June 30, a 43% increase from the previous estimate in March. The figures also revealed that the government had paid £7.4 billion to lenders under the state guarantees.
A spokesperson for UK Finance, representing credit providers, expressed their commitment to ensuring loan repayments and addressing fraud. Suspected fraud is not necessarily a reason to withdraw a guarantee, as long as the lender adheres to the scheme’s rules, according to another source.
A second source, who was involved in drafting the scheme but requested anonymity, suggested that it should not be surprising if loans that banks wouldn’t typically consider led to problems. They added that lenders had expressed reservations at the time.
The BBB had also voiced concerns prior to the launch of the BBL scheme. In a May 2020 letter to the government, the BBB warned that the scheme was “vulnerable to abuse by individuals and participants in organized crime.” In response, the government acknowledged the risks but decided to proceed, citing the unprecedented challenges facing the country.
