The cost to the taxpayer of the government’s emergency loan scheme for struggling small businesses could be as much as £26bn, a new report has found.
According to the National Audit Office (NAO), the cost of the government’s Bounce Back Loan scheme “has the potential to be very high” through a combination of firms being unable to pay back the loans and fraud.
BBLs are 100 per cent government-backed loans introduced to help keep small businesses afloat through the economic disruption caused by the Covid-19 pandemic.
Businesses can apply for up to £50,000 in loans under the scheme and have 10 years to repay.
As of 20 September, loans totalling just over £38bn had been approved for 1.3m small businesses under the scheme, according to Treasury figures.
The five largest UK lenders have been responsible for 89 per cent of the value of the loans distributed, the NAO said.
In addition, 90 per cent of the loans have gone to so-called microbusinesses – those with turnover below £632,000.
In the last week the scheme has come under increased scrutiny because of fears over the speed at which it was set up.
“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 report said.
“Government also recognises that the decision to provide funds quickly leaves public money exposed to the risk of fraud.”
The British Business Bank, which administers the scheme, and the Department of Business, Energy and Industrial Strategy (BEIS) estimates that the scheme will have lent up to £48bn by 4 November.
However, due to increased risk of credit and fraud risk, it has been estimated that between 35 and 60 per cent of lenders could default on the losses.
Assuming the scheme lends £43bn, this would imply a potential cost to the government of £15bn to £26bn, the NAO said, but added that the estimates was “highly uncertain”.
“Over the coming months, the extent of losses due to fraud will become clearer, 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.”
The NAO’s head, Gareth Davies, said: “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.”
Because the loans are fully backed by the government, the incentive for lenders to recover the money is lower, the report added.
In response to the findings, the BBB said: “Since launch the fraud risks within the scheme have been mitigated by accredited lenders undertaking standard fraud checks as part of the scheme’s application process and for new business customers the scheme insists lenders apply their standard Anti-Money Laundering (AML) and Know Your Customer (KYC) checks.
“In addition, the Bank, the government, fraud prevention services, fraud bureaux and the banking and alternative finance sectors have acted swiftly post-Scheme launch to put in place additional measures, beyond the standard checks, to further mitigate fraud risks.
“The Bank has also worked with lenders and HMG colleagues to implement BBLS successfully, including accrediting a range of lenders forming a diverse set of providers under the scheme.”