The U.K. emergency business loan borrowers nightmare

 THE  BIG  PICTURE:
In total, £58 billion has been loaned by various UK’s coronavirus emergency lending programs — about 2.6% of GDP.  In France, companies have received €106 billion — about 4% of GDP. In Spain, the state-owned bank ICO has guaranteed over €100 billion in business loans — almost 10% of GDP.

U.K. emergency business loan borrowers do not have to begin paying back the loan for one year. For many borrowers that will be in May, June or July next year, “Month 13 is going to be an interesting moment,” says Metro Bank PLC CEO Dan Frumkin. “It is the moment when people need to start paying back the [Bounce Back Loan Scheme loans], and we fully expect there will be a significant amount of defaults.”

The U.K. loans are self-certified!  Banks are not liable for any unpaid debts, so they they release the funds with little in the way of background checks. This has created a goldmine for enterprising criminals.

Fake businesses have been set up to access the cash, the National Crime Agency (NCA) said recently. Gangs get a victim’s personal details using phishing emails or by purchasing them online. They set up a fake company in his or her name. After opening a business bank account, they apply for a Bounce Back Loan through the same bank. Although the rules state that firms set up after March 1, 2020 are not eligible for the program, applications have been successful as late as June, reports the BBC.

Many of the legitimate loans will end up in default too. According to the Chancellor of the Exchequer, Rishi Sunak, taxpayers could face losses of up to £23 billion in bad loans across the state coronavirus emergency bailout schemes. That’s the equivalent of 40% of all the money loaned.

A June report from the Recapitalisation Group, a task force assembled by The CityUK, one of the UK’s most powerful financial lobby groups, and EY forecast that up to £36 billion worth of government-backed business loans — 62% of the current total — could become toxic by March of next year.

Many of the small businesses who got out emergency loans have no history or experience of borrowing or repaying debt. Lenders estimate that up to 70% of BBL borrowers have never borrowed before, equating to over 700,000 small- and medium-sized enterprises (SMEs), according to The Financial Conduct Authority (FCA).

These companies have taken on large volumes of debt for the first time ever, merely to weather the virus crisis while, in many cases, generating a lot less in revenues. Many of them now have much weaker cash flow..


DETAILS:
In the UK, mortgage forbearance is scheduled to end at the end of this month, along with the the government’s job retention program. Both will put pressure on struggling businesses and their owners. Old debts, including mortgages, will come due, at the same time that companies will have to start paying their staff’s full wages, for the first time in seven months. More than a third say they plan to lay off staff over the next three months, according to a YouGov survey.

Al European countries will soon have to face a surge in non-performing loans, especially where emergency lending to distressed businesses was on a much larger scale than in the UK.

UK Finance, a lobby group representing UK-based banks, is weighing up creating a debt collection entity to be used by all British banks faced with recovering unpaid coronavirus loans. The European Commission is looking at ways to securitize bad loans at the EU level and offload them to global investors, recently done in crisis-hit Italy. All the proposals have one thing in common: the government, whose debt is already soaring, will foot the bill.
 

The U.K. small-business emergency loan program was a goldmine for criminals. Even legitimate borrowers face sky-high default rates.  Demand continues to surge for the UK’s Bounce Back Loan (BBL) program, which provides cheap emerging lending to small and medium-sized businesses. HSBC recently announced it the deluge of new applications caused them to halt pandemic lending to new business customers.

The BBL program was first launched in May. Since then, £38 billion has been lent to 1.26 million businesses(out of about five million businesses. Small and medium sized enterprises are able to borrow up to 25% of their revenues, to a maximum of £50,000, interest-free for 12 months, administrated by private-sector banks, but 100% backed by the government.

Banks have also loaned an additional £15.5 billion to 66,600 mid-sized businesses (with revenues up to £45 million) through the Coronavirus Business Interruption Loan Scheme (CBILS), and £3.5 billion to 566 large businesses (with revenues over £45 million) through the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Both loan programs are 80% guaranteed by the State.

Before the BBL program, little emergency lending was reaching small UK businesses, partly due to red tape, but also because 80% of each loan was guaranteed by the state. That means banks had to assume 20% of the risk of non-payment on loans that they knew had high risk of non payment. That's why the government decided to provide 100% backing for the Bounce Back Loans.

In early May, two days before the program was launched, the chief executive of the state-owned British Business Bank, Keith Morgan, warned that the program was at “very high risk of fraud” from “organised crime.” The bank, he said in a letter to Business Secretary Alok Sharma, could not guarantee “robust controls”:

    “The scheme is vulnerable to abuse by individuals and by participants in organised crime. Alongside the fraud risk, there will be considerable credit risk in the current economic environment, which will be exacerbated by removing significant elements of the credit checks that would otherwise have been undertaken.”