Yesterday, two quite bizarre points about the Bounce Bank Loans Scheme (BBLS) emerged, as reported by James Hurley in the Times.
First, the Department for Business, Energy and Industrial Strategy (BEIS)’s annual report and accounts was published and showed that expected losses on the Bounce Back Loan Scheme are in the range 35-60%. That’s £13.3 to £22.8 billion of losses based on the latest uptake figures that show loans taken by 1.2 million UK small businesses.
Second, the British Business Bank (BBB) published a ‘Reservation Notice’, a letter from the former BBB CEO Keith Morgan to BEIS Minister Alok Sharma MP in May, that objected to the launch of the BBLS on the grounds that it was too open to fraud and did not represent value for money. Sharma had to issue a ‘Ministerial Direction’ to overrule the BBB.
Is the BBLS really such a disaster? It’s certainly true that the loans are far riskier than normal, as there’s no checks on the ability of the business to repay. Even so, the conditions for use should provide some level of risk control:
BBLS started on 4 May and businesses only qualify if they were established before the lockdown i.e. by 1 March. It is hardly likely many fraudsters had the prescience to rush out and establish new companies in February ‘just in case’ although no doubt many other methods of tricking this system have been identified.
Businesses can apply for between £2,000 up to 25% of their turnover, i.e. to qualify for the full £50,00 loan the business would need to show turnover of £200,000. That limits the lending risk, as the least established businesses only qualify for relatively small loans.
Is BEIS really thinking that the majority of businesses meeting these requirements and taking up the loans could not only struggle to repay in full, but will actually default and fail to repay the full advance? That seems extraordinarily pessimistic.
The Annual Report states the ‘initial indicative loss ranges are based on historic losses observed in prior programmes which most closely resemble the current COVID-19 interventions. What are these prior programmes? Has the UK Government ever before done anything like this? It’s an extraordinary statement and given the value at risk it really need explaining. Otherwise it might appear a jibe at the Treasury, which clearly forced through the Scheme.
Perhaps losses could exceed 10%. Possibly if the economy continues in the doldrums for many more months they might even reach 25%? Any higher than that it strongly suggests that the banks issuing these loans have either failed to carry out any eligibility checks or have carried out such checks using incorrect data.
What about the BBB’s role in all of this? We need to look back at the BBB’s efforts to help SMEs prior to the lunch of the BBLS. The BBB had its Coronavirus Business Interruption Loan Scheme (CBILS), a re-badged version of the longstanding Enterprise Finance Guarantee (EFG). This remains in place, running in parallel to BBLS. Like the EFG, CBILS provides leaves the lenders exposed to part of the loan (20% for CBILs, 25% for EFG). Like the EFG, CBILS came with a library of rules for lenders, who stood to lose the entire advance if they fail to adhere to the small print.
This means the lenders still have skin in the game and will take care when lending. That may seem a good thing, but it does limit lending. In April, according to trade body UK Finance there were 27,000 CBILs loans. In the first week of the BBLS, there were 268,000 loans. The pent-up demand for support to small businesses was clear at the time, widely reported and confirmed by the BBLS uptake. CBILS just wasn’t reaching most small businesses and the Government had to do something quickly to help prevent a massive rise in small business failures.
Regardless of whether the loss rates on BBLS prove to be nearer 10% or 65%, it seems likely that given more time a less risky scheme could have been devised, one that was less exposed to fraud. Yet week after week prior to the BBLS announcement the BBB was persisting with CBILS and apparently not recognising the growing urgency of supporting unprecedented numbers of businesses. In effect, the BBB forced Rishi Sunak to announce something far more ambitious, simple, and generous.
The root cause of the BBB’s limited ambitions in response to Coronovirus, and this unseemly squabble between the BBB and BEIS, seems to be the BBB’s role. The BBB supports SME lending without earning profits but aiming to break even outside of schemes that are supported by BEIS. This is different from agencies in other countries, including the US Small Business Administration which judges how best to support SMEs and bids for Government funding for its budget proposals.
Coronovirus has exposed the limitations of the BBB’s role - at what cost only time will tell.
Update 2 October: Within 24 hours of the BEIS estimates being published, the FCA has reported that "estimates of likely rates of arrears are uncertain but range from around 25% from some large lenders to 40% from the Office for Budget Responsibility". That's arrears, not losses. Is it possible BEIS actually meant arrears, not losses?