Business defaults and fraud could result in potential losses of £15bn to £26bn from the government’s Covid-19 bounce bank loan scheme, the National Audit Office (NAO) is warning
The scheme was announced on 27 April to quickly provide loans of up to £50,000, or a maximum of 25% of annual turnover, to registered and unregistered small businesses to support their financial health during the pandemic.
The Department for Business, Energy and Industrial Strategy (BEIS) and the British Business Bank expect the scheme to lend £38bn to £48bn by 4 November, substantially more than the assumed £18bn to £26bn when it launched.
As a result of credit and fraud risks, BEIS and the Bank have made a preliminary estimate that 35% to 60% of borrowers may default on the loans, based on losses observed in previous programmes which are most similar.
The NAO calculates that assuming the scheme lends £43bn, this would imply a potential cost to government of £15bn to £26bn, but these estimates are highly uncertain.
It says the extent of losses due to fraud will become clearer over the coming months, but the full extent of losses, both credit and fraud, will not emerge until the loans are due to start being repaid from 4 May 2021.
Currently, the Bank is unable to estimate the overall level of fraud, but intends to provide monthly fraud reports starting this month.
It has established fraud prevention forums for lenders to share best practice, including methods to prevent duplicate applications, but the Cabinet Office’s Government Fraud Function believes that fraud losses are likely to be significantly above the 0.5% to 5% which is generally estimated for public sector schemes.
As of 6 September, Treasury data shows that the scheme has delivered more than 1.2m loans to businesses, totalling £36.9bn.
Around 90% of the loans have gone to micro businesses with turnover below £632,000. The real estate, professional services and support activities sectors received the largest amount of support – £8.5bn from 283,000 loans.
The loans are delivered through commercial lenders such as banks and building societies, with the government providing lenders with a 100% guarantee. Businesses are expected to repay the debt in full and failure to do so may negatively affect their credit score and ability to borrow in the future.
However, if they do not repay in full, government will step-in and repay the lender. The five largest UK lenders have been responsible for 89% of the value of the loans distributed.
The NAO found that lenders approved loans for existing business customers within 24 to 72 hours but approval times for new customers take substantially longer. Two large lenders that offer loans to new customers estimate that these applications may take between four and 12 weeks because of the high volume received and operational constraints relating to the pandemic.
The government imposed less strict eligibility criteria for the bounce back loan scheme than for other Covid-19 related business loan schemes, to improve quick access to finance for smaller businesses. It relies on businesses self-certifying application details with limited verification and no credit checks performed by lenders for existing customers.
The NAO says this lower level of checks presents credit risks as it increases the likelihood that loans are made to businesses which will not be able to repay them, leading to losses of taxpayers’ money.
The audit watchdog also highlights the findings of a third-party review commissioned by the British Business Bank which identified a ‘very high’ level of fraud risk, caused by self-certification, multiple applications, lack of legitimate business, impersonation and organised crime.
It points out that the government’s 100% guarantee to lenders owing to the absence of credit checks, reduces the lenders’ incentives to recover money from borrowers. If a borrower does not repay the loan, lenders are still expected to try to recover the loan, but they can claim on the government’s guarantee within ‘a reasonable time’ or if no further payment is likely.
The NAO is calling for the government to implement a thorough debt-recovery process with lenders and consider how it might better prevent fraud in any future schemes.
On 24 September, the government announced the extension of the scheme as part of the Winter Economy Plan. The new ‘pay as you grow’ option will offer borrowers more time and more flexibility for loan repayments, though details are yet to be announced.
Gareth Davies, NAO head, said: ‘With concerns that many small businesses might run out of money as a result of the Covid-19 pandemic, government acted decisively to get cash into their hands as quickly as possible.
‘Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct.
‘Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse.
‘It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.’