Banks across the UK are putting together an official, industry-wide ‘code of conduct’ for pursuing businesses repaying the taxpayer-backed coronavirus business loans.
Industry lobby group UK Finance and the British Business Bank have started talks with commercial lenders in order to ensure that industry-wide standards will be in place ahead of the debt-collection period.
Loans that were granted under the coronavirus business loan schemes for small and medium sized businesses have a 12 month repayment-free period with the first batch of loans due to start repayments in Spring 2021.
Industry estimates suggest that up to eight out of ten borrowers may fail to repay their loans in full meaning lenders and investors must take appropriate preparations now. Some of those unable to repay the loans will be down to fraudulent applications which are thought to account for 10-15% of all Bounce Back Loans.
Whilst individual banks normally have their own policies for collecting repayments and dealing with non-payers, the code of conduct could mean a lighter approach than some banks are used to. The code of conduct would ensure that borrowers are treated fairly across the board meaning a customer with a bounce-back loan from e.g. Barclays would be treated the same as someone borrowing from NatWest.
Whilst the Bounce Back Loan Scheme (BBLS) comes with a 100% government guarantee, meaning the state will cover a bank’s losses if a customer defaults on their loan, the Coronavirus Business Interruption Loan Scheme (CBILS) only comes with an 80% guarantee, meaning banks would be left to deal with the remaining 20% of potential losses.
Despite the government guarantees in place, banks are expected to try and recover the full amount before relying on the government aid. How aggressively they are able to pursue these debts is what the code of conduct will decide.
Banks have been warned that £36billion worth of government-backed loans have the potential to turn toxic by next year as companies continue to struggle during the pandemic. Even when businesses reopen many are likely to find repaying debts difficult.
So far during the pandemic banks have approved more than 1million loans worth £42.9billion as of 28th June 2020. The majority of those who have taken out a BBLS are small business owners or sole traders who have never taken out a commercial loan before.
With the economy still reeling from the Coronavirus pandemic, bankers are keen to ensure their reputations don’t take a hit. Having an industry-wide code of conduct in place will go some way to help this.