Without checking affordability, we risk turning lenders into the villains (again).
Originally published in The AltFi Weekly Newsletter, for more like this sign-up now.
As we approach the one-month anniversary of the government’s Bounce Back Loan Scheme (BBLS) it’s fair to say that this lifeline has saved tens of thousands of UK firms from collapse.
More than £14bn has been lent out to SMEs and sole traders, with the likes of Starling Bank and Tide seeing huge demand.
But, in the months and years ahead, a spectre is lurking in how the BBLS was constructed which may come back to bite the banks and the politicians who launched it.
The unintended consequence of the BBLS appears to be how the scheme was explicitly designed by the Treasury in a way where “lenders will not assess affordability”.
This was to avoid the chance of banks refusing to lend or dragging their feet, as we saw with the far slower rollout of the Coronavirus Business Interruption Loan Scheme (CBILS).
For many of our readers the issue above is already plain to see, but let’s spell it out.
Bounce Back Loans are, in all likelihood, being awarded to applicants who are already either deeply indebted, on the verge of bankruptcy, or failing to service existing debts.
That might not immediately be a problem but, when repayments start next year (even at a modest 2.5 per cent interest rate), defaults will inevitably rise.
As Richard Churchill, a partner at Blick Rothenberg, warned The Financial Times: “the taxpayer is now underwriting millions of pounds of unqualified loans.”
Some bankers are predicting defaults at 20 per cent, while nearly half of borrowers (43 per cent) admitted to the Business Banking Resolution Service that they aren’t planning on paying their loans back.
In any case, banks over the coming years will be forced into the expensive process of recoveries on a huge volume of only moderately profitable loans (their conduct during this time closely scrutinised).
More worryingly, given the inclusion of sole traders whose liability isn’t limited, many will be left with bankruptcies on their credit records for years to come.
Borrowers will argue that they were inappropriately lent to, while the lenders will rightly respond that they were instructed by the Treasury to not check affordability.
With this outcome nearly guaranteed, the government of the day will be forced to step in and either offer a programme of loan forgiveness or to convert Bounce Back Loans into grants or equity.
Indeed with this outcome seemingly inevitable, many are already wondering why this hasn’t happened already?
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