The Treasury is reportedly set to reject a City of London plan for a new state-owned organisation that would refinance the billions of pounds of emergency coronavirus loans lent to UK companies.
Chancellor Rishi Sunak is set to rebuff plans put forward by a group led by trade body The City UK and audit firm EY to create a state body to handle the expected backlog of debt piled up by companies using state-back loan programmes, The Financial Times reported.
Ministers reportedly oppose the Recapitalisation Group’s plans which they think could shift the risk for loan defaults away from the banks towards taxpapers.
Lending through the government’s key coronavirus loan schemes has topped £52bn.
The bounce back loan scheme (BBLS), under which the government backs 100 per cent of loans up to £50,000, has seen by far the most use. Treasury figures showed £35.5bn had been lent out through the programme by 16 August.
The coronavirus business interruption loan scheme (CBILS) has seen banks lend out £13.7bn to struggling firms. Yet the approval rate remains below 50 per cent, with 122,900 applications and 60,400 loans.
CBILS lets banks lend out sums of up to £5m to companies. The government backs 80 per cent of the loans.
According to the FT report, the Treasury thinks banks should deal with the reputational cost and risk of defaults on coronavirus loans.
One reason for this is the belief that corporate debt levels were relatively low before the crisis hit.
Appearing before the Treasury select committee in July, Sunak said: “I’m not completely persuaded of the scale of the problem at the moment, I think the simple reason is that we know corporate debt levels in the UK are in a relatively healthy place coming into this crisis.”
Under the City UK scheme, the new body would be able to convert coronavirus loans into new finance instruments, which would give companies more time to repay the money.
Banks reportedly fear being faced with a wave of defaults from companies unable to repay their loans.
Miles Celic, chief executive of The City UK, said: “Our industry, together with independent bodies, is clear that there will be an unsustainable debt burden that will weigh down hundreds of thousands of companies.
“For some companies, that debt will sink them – the OBR estimates as many as 40 per cent of the companies who have taken BBLS loans will not be able to pay them back.
“We continue to have valuable discussions with government and others to identify how best to tackle this increasingly pressing problem.”
The Treasury declined to comment.