Up to 60% of borrowers may default on business loans provided through the UK Government’s Bounce Back Loan Scheme, the National Audit Office (NAO) has warned.
A new report by the spending watchdog says that the scheme “succeeded in quickly supporting small businesses” but the Government faces a potential loss of £15bn to £26bn through businesses not being able to repay the loans and fraud.
The Bounce Back Loan Scheme was set up to support smaller businesses during the Covid-19 pandemic. Loans are delivered through commercial lenders and small and medium-sized firms can borrow between £2,000 and up to 25% of their turnover, with a maximum loan of £50,000 available.
Demand has been greater than anticipated, with the total value of loans provided through the scheme now predicted to be £38bn to £48bn, up from an initial estimate of £18bn to £26bn.
However, the Bounce Back Loan Scheme has less strict eligibility criteria than other Covid-19 related business loan schemes, relying on businesses self-certifying application details with limited verification and no credit checks performed by lenders for existing customers.
This lower level of checks presents credit risks as it increases the likelihood of loans being made to businesses that will not be able to repay them, the NAO said.
What’s more, the Government’s 100% guarantee against the loans reduces lenders’ incentives to recover money from borrowers.
An earlier third-party review commissioned by the British Business Bank found that, while some risks can be mitigated, there remains a “very high” level of fraud risk, caused by self-certification, multiple applications, lack of legitimate business, impersonation and organised crime.
The full extent of losses, both credit and fraud, will emerge when the loans are due to start being repaid from 4 May 2021.
The NAO called for the Government to implement a thorough debt-recovery process with lenders and consider how it might better prevent fraud in any similar schemes in the future.