Chancellor Urged to Cover 100% of Business Loans

21-04-2020

With payday looming, the roll-out of the government’s flagship bailout scheme is facing mounting criticism The chancellor is facing mounting pressure to fully underwrite loans to hundreds of thousands of small businesses ahead of payday this week. Chancellor Urged to Cover 100% of Business Loans

Under the government’s flagship £330bn bailout scheme unveiled last month, the Treasury has promised to cover 80% of wages up to £2,500 a month to businesses who furlough staff rather than making them redundant.

However, one month into the lockdown, and with Friday’s payday looming, “businesses are fast running out of cash” but “money is only trickling out of [Chancellor Rishi] Sunak’s £330bn bailout fund”, says The Times.

As of the middle of last week, only £1.1 billion had been lent to about 6,000 of Britain’s 5.8 million small companies. Yet today up to 2.3 million businesses are eligible to apply for government furlough cash to pay wages, “potentially flooding HMRC’s new website when it opens”, says The Times.

Comments by Bank of England Governor Andrew Bailey that an extension of government guarantees to lenders from 80% to 100% could speed up the delivery of financial assistance to cash-strapped firms and make the process less complicated has “heaped additional pressure on the Chancellor to follow the example of other countries” says the BBC.

Once again Germany has been held up as the example to follow. Fully backed by the state, its scheme has already lent out €7bn compared with just £1.1bn in the UK.

US lenders have approved more than 300 times as much lending as in the UK while even Swiss banks have approved 98,000 loans, compared to just over 6,000 in the UK.

Arguing “numerous restrictions to both lenders and borrowers show the state-backed loan scheme is not currently fit for purpose”, The Telegraph says “banks still feel the need to put a big effort into the so-called ‘forward-looking viability assessment’, which is supposed to work out the chance of a company actually having a business on the other side of the crisis”.

“Many have said they are worried the British Business Bank, the administrator of the loans, will use inadequate assessments as an excuse to walk away from the 80% of the loan that the government is guaranteeing,” the paper says.

The BBC reports that “currently banks do not feel they can dispense with normal credit checks just because they may ‘only’ lose 20% of the sum advanced”.

Shadow business secretary Ed Miliband is one of a growing number arguing that the state should fully underwrite the loans rather than just 80% of the value as it currently does.

“On the other side of the crisis, you will not wish you had done less but that you had done more,” he said.

However, the BBC adds that “expanding the guarantee to 100% would mean the taxpayer would be taking all the risk that the loans were not repaid”, an outcome Miliband has admitted creates a “moral hazard”.

Source: theweek