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Chart of the week: Bounce Back Loans

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Written by Publishing Team

Our chart this week is on Bounce Back Loans, one of the main sources of financial support for companies during the first year of the pandemic and the subject of a recent investigation by the National Audit Office.

The Department of Business, Energy, and Industrial Strategy (BEIS)’s latest publication for 2020-2021 calculations included an assessment of expected losses on financing provided to businesses through the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Program. (CBILS), the Coronavirus Large Business Interruption Loan Program (CLBILS) and the Fund for the Future. This was followed by an updated report from the National Audit Office (NAO) on the scheme’s management and potential losses for taxpayers.

The largest of these has been the BBLS, with Bounce Back loans of up to £50,000 made to eligible companies to help them get through the first shutdown in the second quarter of 2020, before being extended into the entire 2020-21 financial year. In the end, nearly a quarter of the companies took out a loan return, consisting of 1.5 million loans totaling £47 billion at an interest rate of 2.5% to be repaid over six years. Interest in the first year was covered by the government, with no repayment due in that period.

Businesses can extend loans to ten years with the option to pay as you grow, as well as allow up to six months of repayment leave and three interest-only payments to provide flexibility without default.

About 90% of the loans were made by the seven major British banks by value, with the remainder provided by other banks and non-bank lenders, such as peer-to-peer lenders. Each participating financial institution was provided with a 100% guarantee by the government to cover any unpaid amounts. Half a million or roughly 35% of the loans were for a maximum amount of £50,000 (add up to £27 billion) with £18 billion lent between £10,000 and £50,000 and £2 billion for amounts between £2,000 (minimum possible) and £10,000.

As the graph shows, the geographical distribution of loans has been weighted towards southern and central England, with £11 billion borrowed by firms in London, £10 billion in the south (£6.5 billion in the southeast and £3.6 billion in the southwest) and 11 billion pounds sterling. in the Midlands and East (£3.8 billion in the West Midlands, £2.9 billion in the East Midlands, and £4.5 billion in the East of England), for a total of £32 billion. The balance of £15 billion was split between £9 billion in the North (£3.2 billion in Yorkshire and the Humber, £4.8 billion in the North West and £1.3 billion in the North East) and £6 billion in the other countries in the United Kingdom (£2.7 billion in Scotland, £1.6 billion in Wales and £1.3 billion in Northern Ireland).

More than 90% of the loans, amounting to 40 billion pounds, went to small businesses, i.e. companies with turnover less than 632,000 pounds.

BEIS estimated in its 2020-2021 financial statements that it does not expect to repay 37% of the £17 billion loans, including £12 billion estimated bad debt and £5 billion estimated loss from fraud, despite The National Audit Office says these numbers are highly uncertain at this point. With £2 billion already repaid, this leaves £28 billion that is believed to be recoverable over the remaining six years of loans (or 10 years for extended loans).

The fraud estimate, for 11% of loans worth £4.9 billion, was based on a sample of 1,067 loans on March 31, 2021, but a subsequent analysis in October 2021 suggests that the level of fraud could be roughly 7.5% lower than that of loans so there is some hope of BEIS and British Business Bank being able to reduce the amount they will have to pay to participating banks under 100% guarantees.

However, as NAO reports, these guarantees mean that participating banks have no financial incentive to pursue repayment and have raised concerns that not enough resources have been allocated by BEIS and the British Business Bank to recover the amounts owed.

The challenge for the government is that many companies have not been able to return to their pre-pandemic level of operation, and therefore sensitivity is needed, while at the same time seeking to protect public money and address those who have made fraudulent claims.

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