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Summary
- Banks are eager to foreclose the emergency coronavirus loans availed by the SMEs
- The UK’s treasury has turned down the idea of setting up a COVID-19 debt bank
- Around £38 billion was disbursed as loans under the government backed schemes to help more than 900 thousand businesses
Banks are most likely to foreclose the Covid-19 debt that was issued to small businesses during the peak of the unprecedented crisis. The lenders have sensed a high probability of default from small businesses.
£35 billion worth of bounce back loans issued under the Covid-19 debt is likely to turn bad, as per the insights from the Office for Budget Responsibility. Nearly 50 per cent of bounce back debt is likely to turn bad. Most of the banks believe that half of the small businesses do not intend to repay emergency coronavirus loans, which they took during the peak of the heightened crisis.
Banks are eager to foreclose the emergency coronavirus loans availed by the SMEs because than the government would come into the picture and would be liable to repay the outstanding debt amount. Hence, banks are willing to foreclose it at a loss and then file a claim with the British government.
Though, the chancellor of the Exchequer, Rishi Sunak has turned down the idea of setting up a COVID-19 debt bank. The idea was to create a dedicated entity, which would be responsible for recovery and managing the debt accumulated by small businesses through state-backed loan schemes. From bank’s perspective, the loans offered under coronavirus schemes would not reflect on their books. This would be a mere cosmetic transaction in terms of representing it. Irrespective of the way it looks, it all boils down to the taxpayer’s money.
Present scenario of the banking industry
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 contain the spread of the deadly pandemic and asked people to stay indoors. Only the businesses which dealt in essentials category, including banks, remained operational.
UK lenders primarily facilitated the subscription of various government backed support schemes during the unprecedented crisis. Most of 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. UK lenders believe that it would be harder for borrowers to repay their debts amid the economic downturn caused by the coronavirus pandemic outbreak. NatWest Group Plc (LON:NWG), formerly Royal Bank of Scotland has provisioned for more than £800 million as it expects a surge in the number of assets which could turn bad given prevalent conditions in the economy due to Covid-19 crisis. Due to the economic fallout caused by the coronavirus pandemic, NatWest has now made provision of nearly £2.9 billion against potential loans default and credit risk. In addition, the leading bank is expected to set aside impairment charges between £3.5 billion-£4.5 billion for the rest of 2020, in anticipation of the economic catastrophe caused by the deadly virus. During the first half of 2020, the bank reported a £770 million loss. However, NatWest Group has a resilient and diversified business model along with a robust capital position.
According to some media reports HSBC Holdings Plc (LON: HSBA) has probably put aside more than £8 billion for expected credit loss (ECL) mainly due to the global impact of Covid-19 on the economic outlook in the near term. However, its 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
As per the industry regulator FCA (The 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 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 accounts to nearly £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
The banking sector should chalk out a proper plan to maintain the 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 the government-backed loans in 2021. There is apprehension that these businesses could struggle to service their debt in case of prolonged crisis.
The banks must find a delicate balance between treating the battered businesses fairly and instilling faith in them. The banking industry should ensure that nothing should push back UK businesses on their path to recovery. In addition, the nation has witnessed a lot of redundancies in recent times, and the business model of UK based banks is consumer driven. Therefore, job losses could indirectly impact the bottom line of the banking sector in the UK. The employment and banking business is highly correlated in terms of mortgages, credit cards, unsecured lending, and many other banking products. The British government must provide an environment, which is conducive of job creation and encouraging economic activities.
