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A recent data released by the Bank of England has showed that the consumers in the country have cleared as much as £3.8 billion debts while the debt level in regard to the businesses borrowing money has been increasing drastically. The clearing of debt levels by the average consumers range from all general purpose loans to credit card loans to even housing loans; data suggests that it is one of the highest repayment rates observed in recent times.
It seems that the average British consumer is availing this lockdown opportunity to clear off his debts from the money he usually used to spend on recreational activities like going out to pubs, to restaurants, or for vacations in normal scenario. The lockdown conditions in United Kingdom have been imposed since the third week of March and is expected to continue beyond May 7.
Prime Minister Boris Johnson today sent across a video message on twitter stating that easing the lockdown restriction at this stage would be the ‘worst thing we could do.’ Talking ahead of the deadline of May 7, Prime Minister said that UK could move to the second phase of less-intense lockdown only when the five tests had been met. It includes:
- Availability of enough critical care capacity to NHS
- Decline in Infection Rates to ‘manageable levels’
- Sufficient Stock of PPE and Testing Kits
- Consistent decline in number of deaths
- Any change in lockdown easing shall not lead to a second peak of infections
The United Kingdom sits on fourth position in the highest number of coronavirus cases worldwide followed by the USA, Spain and Italy. In such a scenario, the news of speedy loan repayments by consumers is perhaps the good news that has come in a long time for the banking industry, one of the worst hit sectors due to the pandemic. In stark irony, however, during the past two months the flow of loans towards the business and economy has seen an unprecedented growth, thereby increasing the risk levels in the banking systems. But the government’s unprecedented loan guarantees and other measures taken in the recent past had been directed to minimise the risk of probable loan losses on banks.
On the question of risk levels of the banking industry, the Coronavirus Business Interruption Loan Scheme (CBILS) that was announced last month is an unprecedented effort made by the British government to safeguard the banking system while it provides support to the large and medium businesses in the country to deal with the pandemic induced business slowdown. The Coronavirus Business Interruption Loan Scheme (CBILS) entailed that the Bank of England would guarantee loans taken by companies in the country upto a total of £350 billion. The loans while not increasing the risk levels of the banks, protected businesses and were clearly earmarked by the government to pay for salaries and other important expenditures, while the businesses tried their best to navigate through the crisis and stay afloat.
Recently, the British government has rolled out a new scheme for the small and medium sized businesses whereby the government will be underwriting small loans of upto £50,000 for small and medium sized business who have been unable to take advantage of the Government's earlier stimulus scheme the Coronavirus Business Interruption Loan Scheme (CBILS). This loan facility along with the CBILS scheme is in addition to the Furloughing scheme that the government had announced last month whereby businesses of all sizes in the country would be able to put upto 80 per cent of their staff under the direct benefit of the scheme. The Furloughing scheme entailed that the government would bear as much as 80 per cent of the salary cost of these employees running upto a maximum of £2,500 per month per employee. The new credit facility puts to rest all the criticism over the previous government schemes that had been announced in the past one month and were being claimed to support just large businesses. It seems now that these employees who are receiving the benefit of the scheme and are currently uncertain of their employment in the next few months and are, therefore, taking the opportunity to offload any kind of debt that they may be carrying. The furloughing scheme of the government thus is seemingly helping the banking system bring down its consumer credit risk levels.
The banks, however, are still very edgy over their rising risk levels with an increasing number of bottle necks arising in loan disbursements. The applicants had claimed that banks have been too slow in processing these loans. The scrutinizing process of the applications with the banks took a long time and, on many occasions, the applicants said that banks have started refusing the applications when the disbursement of cash was needed at the most urgency. But, banks have explained that several of these companies do not have a good credit standing to be eligible for the Coronavirus Business Interruption Loan Scheme (CBILS), and the number of companies in the country with this problem are several.
A banking industry estimate published last week explained that £5 billion must put to provision to adequately cover for the potential non-performing assets that are expected to grow in the books of banks across the country. While the banks are already expected to be severely disrupted this year due to a significant drop in their business activity levels led by economic downturn, this news comes as a double whammy.
The Bank of England while publishing the data on consumer loans repayments stated that till now £34.1 billion worth of loans had been advanced to firms during the month under the Coronavirus Business Interruption Loan Scheme (CBILS), the highest figure since the bank started keeping records since 1998.
The office of the budget responsibility has estimated that the British economy will shrink by as much as 35 per cent in the quarter April to June this year and for the full year it will be down by as much as 13 per cent. Similarly it also estimates that unemployment during the period will also increase by about 2 million which is nearly 10 per cent of the country’s current work force. The IMF in its report published in mid-April has further estimated that the economic recession that the United Kingdom is going to witness because of the pandemic would be unprecedented and even worse than that seen during the World War II.
The continued government support is likely to ensure that the operating environment does not deteriorate further for these banks. Further, the installment repayment holidays had provided borrowers much needed breathing space to make the payments rather than putting extra burden on banks to deal with large number of ensuing foreclosure proceedings.
