Defaults on UK Covid Emergency Loans Expected to Reach £ 5bn

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Updates on UK business and economy

According to estimates by officials and bankers, up to £ 5bn in state-backed Covid-19 government emergency loans are at risk of default, who said initial data suggested defaults payment would be much lower than initially feared.

The assessment is based on the first months of debt service, which shows that so far between 5% and 10% of small and medium enterprises (SMEs) that have taken advantage of the coronavirus support program for the ‘rebound The government’s £ 47.4 billion failed in repayments.

Bankers said the stronger-than-expected economic recovery after the pandemic had helped companies regain their financial independence. A bank executive said that up to 5 percent of all loans had already been repaid in full by the end date of the 12-month interest-free payment period.

“It’s a better estimate at the moment, but the first signs are that the losses are unlikely to be in the tens of billions as feared,” the executive said. “It is clear that not all loans were taken out of desperation but out of prudence.”

But some bankers have warned that the government could have fended off the worst of problems with its “pay as you grow” program, which offers repayment holidays of up to six months as well as extended loan terms of up to 10 months. years. The Treasury declined to comment.

Last summer, the government gave preliminary estimates that between 35 and 60 percent of borrowers could default on their loans. The Office for Budget Responsibility (OBR) estimated in December that the collateral behind the bounce loans could cost the taxpayer up to £ 19 billion.

Under the loan program – rushed by the government last year in an attempt to support hundreds of thousands of small businesses threatened with bankruptcy due to coronavirus restrictions – banks could offer state-guaranteed loans up to ‘to £ 50,000. The taxpayer must therefore cover all losses.

Officials, who also confirmed the better-than-expected default rate, said they had no estimate of what proportion of fraudulent loans were part of the £ 5bn figure.

Since all loans come with a 90-day repayment period, banks will need to start assessing their portfolio prepayments in the coming weeks, as repayments on the first loans began in June. Before pursuing debt collection, however, banks are expected to seek contact and work with the borrower. If the company cannot repay, the lender will seek to trigger the state guarantee.

Businesses were able to access the Bounce Loan program through a streamlined application process that included only limited checks as it was designed to get funds as quickly as possible for struggling businesses. This led to large initial estimates of potential losses for the taxpayer.

Bankers say default estimates for other emergency coronavirus loan programs with tighter controls were much lower. They estimate the bad debt exposure for the coronavirus business interruption loan program for large SMEs was less than 1%.

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