We need a ‘bad bank’ to save fintech lenders

By Oliver Smith on Wednesday 10 June 2020

OpinionAlternative LendingDigital Banking

Saving the economy will has created a £36bn bad debt crisis, and alternative lenders will need a solution.

We need a ‘bad bank’ to save fintech lenders
Image source: Omar Ali/EY.

Originally published in The AltFi Weekly Newsletter, for more like this sign-up now.

The drum-beat of banking concern over the weight of debt being placed on UK small businesses is reaching a crescendo.

This week TheCityUK Recapitalisation Group (RCG), led by Aviva chairman Sir Adrian Montague, warned that by March 2021 more than £123bn of government-backed loans will have been distributed via the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS).

Of these, RCG predicts as much as £36bn of loans will have gone bad, overwhelmingly led by BBLS lending (£23bn) which, due to the affordability concerns that we’ve warned about before, will come back to bite.

And especially come back to bite for fintech lenders like Starling Bank and Tide, which will be forced into the expensive process of recoveries (their conduct during this time closely scrutinised) on a huge volume of only moderately profitable loans.

So what’s the answer?

Ideas presented by the BCG include turning debt into equity, a profit tax, repayment holidays, or luring in private investors like pension funds to shoulder some of the burden.

But as Omar Ali, chair of the RCG Working Group and EY Financial Services UK Managing Partner, concludes: 

“None of the options we outline neatly solve all of the problems faced by many businesses as a consequence of the pandemic... if this were easy, there wouldn’t have been a need to set up the Recapitalisation Group.”

Indeed the RCG was set-up to establish private sector solutions, but what’s painfully clear from reading its report is that the public sector is desperately needed to fix this looming debt crisis.

In the wake of 2007's financial crisis, over £100bn of bad mortgages from Bradford & Bingley and Northern Rock were transferred into the hands of UK Asset Resolution, a ‘bad bank’ designed to sort out the mess and return value to taxpayers.

As its nickname suggests, the plan wasn't loved by a UK public already angry at banks for having caused the crisis, and who saw such a move as debt forgiveness for reckless lenders.

It did mean, however, that those same big lenders could focus on supporting the UK’s economic recovery.

A similar solution in 2020 is inevitable—even more so this time as reckless lending has been encouraged by the government through its coronavirus schemes.

Combined with some of the RCG’s ideas of debt-to-equity, repayment holidays, etc, we might just have a solution that’ll support the economy without drowning SMEs in debt.

Not taking such action would be leaving Starling, Tide, and a host of other alternative lenders to foreclose on tens of thousands of UK businesses in the coming years, just as the recovery takes hold.

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