Coronavirus: UK Banks Braced for Loan Losses; Some Small Businesses Denied Support

Coronavirus: UK Banks Braced for Loan Losses; Some Small Businesses Denied Support

Summary

  • UK lenders believe that it would be harder for borrowers to repay their debts amid the economic downturn caused by the coronavirus pandemic
  • Around £38 billion was disbursed as loans under the government backed schemes to help more than 900 thousand businesses
  • NatWest Group has reportedly terminated its relationship with SME customers who applied for government-backed loans by closing the accounts

The banking industry has been under the pump since the onslaught of the novel coronavirus across the world. Banks are the engines of the economy as they regulate and control the flow of credit in an economy. As the coronavirus pandemic washed up the shores of the United Kingdom, most of the economic activities came to a screeching halt altogether. The British government imposed lockdown to curtail the spread of the deadly pandemic and asked people to stay indoors. Only the businesses which deal in essentials category including banks remained operational.  

UK lenders primarily facilitated the subscription of several government backed support schemes during the unprecedented crisis. Most of the Britain’s largest banks have put aside billions of pounds as a provision to help cover potential loan losses during the first quarter of the unparalleled catastrophe. Lenders believe that it would be harder for borrowers to repay their debts amid the economic downturn caused by the coronavirus pandemic outbreak.

Banks already keeping aside funds for expected debt defaults

According to media reports HSBC Holdings Plc (LON: HSBA) has put aside more than £8 billion for expected credit losses (ECL) mainly due to the global impact of Covid-19 on the economic outlook in the near term. However, retail banking and investment distribution performance remained resilient in difficult economic conditions.

Also read: UK Banks Must Take A Prudent Course Against the Rising Debt Levels Amid the Pandemic

Another leading UK lender, Barclays Plc (LON: BARC) reported £2.1 billion charges for first quarter as borrowers struggle to repay loans due to the economic impact of the crisis induced by the coronavirus pandemic. As per media reports, Barclays group might have to set aside £4.5 billion to cover non-performing assets (NPA’s) this year. Likewise, Lloyds Banking Group Plc (LON: LLOY) was forced to take a £1.4 billion charge to cover a surge in bad assets during the peak of the unprecedented crisis which severely dented its profits. NatWest Group Plc (LON: NWG), formerly Royal Bank of Scotland has provisioned for more than £800 million as it expects a surge in number of assets which could turn bad given prevalent conditions in the economy due to Covid-19 crisis.

According to UK’s banking industry body, FCA (Financial Conduct Authority), around £38 billion was disbursed as loans under the government backed schemes to help more than 900 thousand businesses stay afloat during to the Covid-19 induced lockdowns and their catastrophic impact. This is only a one-third of debt which could lead to increased NPA’s (non-performing assets) for the banking sector. The remaining two-thirds of debt which amounts to £107 billion lies with UK’s small and medium-sized businesses which could turn bad and lead to degradation of asset quality of the banks by March 2021, due to the slower reopening of the economy. In addition, the credit moratoriums and repayment holidays are already burning a hole in the pocket of the financial institutions.

Also read: UK Banks Agree to Suspend Dividend and Bonuses Worth £8 Billion

Need for a detailed plan

The banking sector should chalk out a proper plan to sustain its asset quality. This could be done by segregating the sectors which are hard-hit than the others and then rolling out sector specific guidelines to their respective debt arrears teams.  UK’s small and medium-sized businesses are expected to start repaying of government-backed loans in 2021. The banking sector fears that these businesses could struggle to service their debt in case of prolonged crisis.

The flip side

On the flip side, many small businesses in UK were not able to put their foot in the door of banks for accessing Covid-19 schemes. UK’s lenders purposely closed doors for these new customers. As per media reports, NatWest Group has reportedly terminated its relationship with customers who applied for government-backed loans by closing their accounts. Businesses complained that they were unable to access cash, which would help them remain afloat through the pandemic. With this kind of response from the banking sectors, setting up a new business would be a task and would surely dishearten budding entrepreneurs. 

The Chancellor of the Exchequer, Rishi Sunak has earlier promised a hassle-free criterion to access the government backed loans. In addition, these loans were backed by the state, which meant that in case of default, the government would honour the contract by paying the lender. The lenders are giving preference to businesses, whose owners hold a personal account with them. The owners of struggling businesses are facing hardships in raising funds to survive the pandemic crisis.

Meanwhile, there has also been a few instances where the banks in the UK were charged with profiteering amid the coronavirus crisis by charging superfluous fees for government backed loan disbursement schemes. In addition, the banks also demanded personal guarantees from businesses against disbursing these loans. The government backed schemes were launched to help the UK businesses to stay afloat and protect the economy and were not devised for profiteering.

However, the UK’s economy seems to be in an uncharted territory, which is surrounded by ‘double risk’. The financial system is under a lot of pressure due to questionable asset quality amid the coronavirus crisis. Moreover, the situation is further aggravated due to an epic freeze of a real economy which consists of real goods & services consumed by the households, and businesses in the wake of coronavirus pandemic.

The slower reopening of the economy and social distancing guidelines could act as a catalyst to this ‘double risk’.  A prolonged crisis could lead to credit defaults and collapses in the real economy, thereby disrupting the flow of credit in the economy, which would eventually lead to scarcity of growth opportunities and investments. 

Banking industry is one of the oldest trades and has witnessed several economic collapses and downturns. The banks must find a delicate balance between treating the businesses fairly and instilling faith in them. The banking system should ensure that nothing should push back UK businesses on their path to recovery. According to industry experts, the British economy is likely to take a U-shaped recovery path to come out of the corona-led crisis situation.

 


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