While RBS CEO Howard Davies calls for a “bad debt sinkhole” for loan defaults, bankers warn the Treasury to expect 40–50% of bounce-back loans to be written off.
Banks are issuing warnings that small firms may not be able to pay back even half of the Bounce Back Loans they have taken out. In addition, the Chancellor should be ready for the failure of hundreds of thousands of small firms when this occurs.
Three senior bankers have issued a warning that between 40% and 50% of the 608,000 borrowers who have obtained Bounce Back Loans totalling £18.5 billion may eventually default on the debt.
Banks to pursue BBL defaulters for the debt
Despite the Government’s assurance that it will guarantee all loans up to £50,000 with a 100% guarantee, it is still up to the banks to prosecute business owner defaulting on bounce back loan.
Taking thousands of tiny, frequently family-run firms to court, according to executives, would be logistically unfeasible and would be disastrous for high street banks’ reputations.
There will need to be some preparations taken. One bank chairman told the Financial Times that many of them would be wiped down or transformed into something else. “These businesses are typically too tiny, making the idea of the government owning shares in them unfeasible. What will happen to all of these loans is the question.
RBS calls for bad loan quarantine
The head of the Royal Bank of Scotland has also urged for the establishment of a vehicle to eliminate bad debts left by companies that are unable to pay back all coronavirus emergency loans, not just Bounce Back Loans.
According to a recent poll, there is a chance that “many billion pounds of public money” from government-backed Covid-19 loans made since the March 23 lockdown won’t be repaid, Sir Howard Davies told the Sunday Times.
According to the Business Banking Resolution Service, over half of small enterprises that have taken out government emergency coronavirus loans do not intend to repay them.
According to the BBRS poll, 43% of companies that have obtained either Bounce Back Loans or Coronavirus Business Interruption Loans say they don’t think the government would pursue the debt or that they won’t be able to pay back the loan.
According to Davies, there should be a “holding entity that will hold these loans and turn them into some equity-like structure” if emergency coronavirus business loans are not paid back.
According to him, any banks experiencing defaults will be entitled to contribute BBLs and CBILS bad debts to the fund.
Businesses should seek help if they cannot repay
If a business is unable to repay their Bounce Back Loan, it is important for them to seek professional help. This may include consulting with a financial advisor or a business consultant to develop a plan for repaying the loan and addressing any underlying financial issues. According to a recent report, it is expected that half of small businesses will not be able to repay their Bounce Back Loans. This highlights the importance of seeking professional help early on to address any financial difficulties and develop a plan for repaying the loan. Failure to do so may lead to further financial difficulties for the business in the long term.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.