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Summary
- The risk the government has assumed with the bounce back loan Scheme
- The scope of the scheme so far, and how long it is likely to continue
- The likely contingent options with the government in case of default
- The position of top banks on the schemes and their performance
Even when the government is still pushing for more funds be disbursed under the “Bounce back loan” scheme, the banks in the United Kingdom have already started to ring alarm bells on likely massive defaults. The banks estimate that as much as £18.5 billion of the amount lent out so far, which is roughly 40 to 50 per cent of the total lending, is not likely to come back. The banks state that though the loans are guaranteed by the government, the impending economic scenario is such that many of the businesses who have availed of these loans are still likely to fail. The executives of the banks warn, that with so many businesses failing it will be a logical and a public relation disaster to peruse each of these defaulters through court bankruptcy proceedings. The scheme which had been rolled out in the month of March this year allowed for small and medium businesses to borrow amounts of up to £50,000 on lucid terms interest-free for the first year and no repayment obligation during that time. The scheme under which loans could be applied for online was originally meant for small and medium-sized businesses but was later extended to larger corporates as well, who were unable to benefit from other government announced coronavirus stimulus schemes.
The coronavirus pandemic brought with it an economic situation that was unprecedented in the United Kingdom. The country is currently on the verge of a recession not seen in 300 years. Early in February when the ferocious contagiousness of the coronavirus became evident, it was but inevitable that the entry of the virus into the country cannot be stopped and only measures can be taken to contain it. In order for the containment, the whole country was put under a lockdown, which essentially meant that almost all businesses, be it trading or manufacturing were supposed to be under lockdown as long as the situation demanded. The government sensing the gravity of the situation rolled out various stimulus measures to help all businesses in the country to tide over this tormentuous period. Among the various stimulus measures, there were three schemes that stood out, the government furloughing scheme, the coronavirus loan guarantee scheme, and the bounce back loan scheme. Under the Furloughing scheme, the government assumed to pay 80 per cent salaries up to £2,500 per employee per month of small and medium businesses who would be retained by their employers. Under the Coronavirus loan guarantee scheme, the Bank of England accepted to guarantee loans taken by large corporates who were witnessing complete halt in business because of the lockdown and needed to pay salaries and other expenses. However, the third and the most important of the three was the bounce-back loan scheme, which was meant for the small and medium businesses who were the largest employment and livelihood generators in the country.
The bounce-back loan scheme till now it seems has disbursed close to £40 billion in small-sized loans ranging between £30,000 to £50,000. The process is still continuing, and more businesses are expected to apply for funds under this scheme. Currently, the scheme stipulates that for the first year there will not be any interest charge, and for subsequent years a rate of 2.5 per cent will be chargeable. It is likely that the government may provide additional concessions under the scheme to support business further so that many of them survive the pandemic. Though the government is clear in its communication that it is a loan and needs to be repaid, it can be expected that it will not hard press for recovery in the short run in order to save many of these businesses from collapsing.
The most likely scenario that could develop for the bounce back loan scheme is that the government would ask the beneficiaries to go for a long repayment period so that it may not be hard for most businesses who are still recovering from the pandemic induced slowdown. The government has already been raising debt at high levels in the recent past to finance these stimulus measures and would most likely pay them off over several future years by cutting down on its own expenditures. In that sense, it seems that the government is well covered to deal with the eventuality of the loan defaults. The governments very objective of coming out with the stimulus measures to support the economy during the pandemic was to protect as many jobs and livelihoods. It was but certain at the outset that not every business or job could be saved and that some losses would have to bourn by the government as well.
Three of the largest British banks who were part of these schemes, Lloyds Bank, HSBC and Royal Bank of Scotland have voiced their concerns that though the loans are guaranteed by the government, their repayment will nevertheless have to be pursued by the banks themselves which will be a strain on their resources. The chief of one of these banks even stated that the quality of many of these loans is such that he is not hopeful that a quarter of it will ever come back.
However, despite the overwhelming feeling that a large amount of these loans may not be recovered, their likely impact on the country’s banking system and the government's finances is likely to be minimal. The nearly £40 billion sums that have been lent out so far under the scheme is a paltry sum as far as the likely economy loss the country is staring at because of the impending recession, and the benefit of the number of people kept out of unemployment because of this scheme far outweighs its costs.
Lloyds Banking Group Plc (LON: LLOY)– The share of Lloyds Banking Group was trading at GBX 30.73 on 1 June 2020, at the time it was last checked, up by 2.96 per cent over its previous day’s close.
HSBC Holdings Plc (LON: HSBA) – The share of HSBC was trading at GBX 376.35 on 1 June 2020, at the time it was last checked, up by 1.69 per cent over its previous day’s close.
Royal Bank of Scotland Group Plc (LON:RBS) - The share of Royal Bank of Scotland Group was trading at GBX 115.59 on 1 June 2020, at the time it was last checked, up by 4.75 per cent over its previous day’s close.
