On April 3, 2020, the treasury reported that British banks have now been barred from asking for personal loan guarantees from small business owners who need modest loans to survive during the Covid-19 emergency as part of government-backed £ 330 billion assistance package. Given last month's assurances by Chancellor Rishi Sunak that viable companies would obtain all the support they needed in this crisis, many small firms protested that high street lenders asked to make onerous personal financial promises as a condition of access to the Coronavirus Business Interruption Loan Scheme (CBILS) of the government. Others suggested that borrowers were moving them to other, higher-cost, commercial borrowing services, rather than the subsidy scheme from the government.

What is the Coronavirus Business Interruption Loan Scheme (CBILS) announced by the UK government?

In an announcement dated 17th March 2020, the government declared a massive bailout package for the UK Economy, which is in turmoil since the outbreak of the coronavirus began in the country. The government had placed the economy on an emergency footing to help coronavirus-affected companies and citizens, pledging at least £ 330 billion in state-backed loans as the epidemic escalates. Saying that the British government would have to intervene in the economy in ways that have not been thought of till now. About a few weeks ago, the chancellor also stated that he would also propose tax cuts and other measures worth £ 20 billion to benefit businesses and households suffering in the midst of the economic collapse of the virus. Cash grants worth £ 25,000 would go to retail, leisure and hospitality companies to help them survive the turmoil era. The country's smallest companies in all sectors of the economy would be entitled to receive grants worth £ 10,000.

Challenges with the lending programmes

The government's schemes to provide cheap bridging financing to companies during the coronavirus crisis has been sluggish in its first two weeks, putting pressure on officials and banks to speed up rescue loan reforms amid widespread criticism of the rollout so far. On Thursday night, Rishi Sunak substantially broadened the scope of the loan initiatives designed to keep small businesses afloat, to include bigger businesses, as well as eliminating some of the more restrictive terms. This step by the chancellor was taken after complaints coming in from small business owners about overly stringent requirements in the scheme which prevented many from securing crucial funds.

More than 130,000 enquiries have been made to banks to join the loan program, which provides borrowers a state-backed interest-free credit facilities up to £ 5 million. Until now, only about 1,000 have been reportedly authorised.

The subscription for the Covid Corporate Financing Facility has been equally weak, intended for larger companies to issue government-backed commercial paper, requiring businesses to either have an investment grade credit rating or at least be able to reassure their banks that they will get one under normal trading conditions. While the scheme for large companies has been running since March 23, the Bank of England has purchased just £ 1.9 billion of new commercial paper, with another £ 1.6 billion in the pipeline. When he introduced the scheme, Mr Sunak said that it would include loan guarantees of up to £ 330 billion which could be extended by an infinite amount if the demand for finance were any higher.

How has the Chancellor responded to these challenges?

The chancellor, Rishi Sunak, has barred banks from pursuing personal emergency loan guarantees for small businesses in the face of increasing government concern that borrowers have been slow in meeting aid demands. With the rapid rise in the number of universal credit claims indicating that several small businesses had already failed after the economy was shut down, Sunak paired a new business support plan with a message to banks that they had to move faster.

Under the Chancellor’s revised plan, announced on 2nd April 2020, the following would be included:

  • lenders will be barred from asking for personal guarantees on loans up to £ 250,000
  • The lending programme will now also be extended to include all small businesses impacted by Covid-19, and not just the companies that are not able to raise capital through commercial financing.
  • There will be a new initiative to fund larger companies that are not currently eligible for loans, in which the government will offer an 80 per cent guarantee so that banks could allow loans of up to £ 25 million to businesses with an annual turnover of between £ 45 million and £ 500 million.

While the government officially stated that the great progress is being made in providing much-needed assistance to undertakings that have been badly impacted by the closure of large chunks of the economy, the chancellor has listened to the bodies of employers calling for the scheme to be more extensive, less cumbersome and more rapid.

Banks have been critised for seeking personal guarantee from directors and charging as high as 30% interest rates. In the measure of providing financial support during this crucial time of crisis, Chancellor Rishi Sunak took a strict action against lenders, banning them from asking for any loan guarantee from company owners on their savings or property when the loan amount is equal to or less than £ 250,000. However, the Treasury did not place any cap on the interest rates that the banks can charge.

The government has also eliminated a provision for businesses to show that they have no other means of obtaining funding. According to new data from a research firm based in the UK, there have already been more than 130,000 inquiries from businesses about the loans.

What lies ahead for UK in fighting coronavirus?

Given the increase in the number of daily positive confirmed cases in the country, as well as the death toll curve not seeming to come down, Health Secretary Matt Hancock on 3rd April 2020 suggested that he thinks the death rate from coronavirus in Britain could peak over the Easter weekend as the country reported a new daily high of 684 deaths from the disease in hospitals.

If this situation continues, the market predicts that there could be a further negative impact on the economy, which is already entering a period of recession. Experts believe that currently, the economy is majorly suffering on the business front, but things do not look as grim on the treasury as they continue to announce rescue packages to make sure that the businesses continue to survive. But if this lock down continues for more than what has been currently planned, the treasury might also face an extremely challenging situation that has not come forth since the two world wars.

Experts have also suggested that Rishi Sunak, as well as the Bank of England will have to make extremely calculated moves both in terms of monetary and fiscal policies so that once this phase is over, the recession is short-lived.

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