The UK taxpayer took on the risk of lending to many businesses that may not have needed financial support to survive the Covid crisis, according to an official evaluation of government-backed pandemic loans schemes.
Between 38 and 45 per cent of businesses surveyed in the report commissioned by the British Business Bank, which administered some of the loans, said they would not have sought debt financing in the absence of government support, with many seeking funding to become more resilient against future risk.
The Covid-19 loan guarantee schemes could have saved between 150,000 and 500,000 businesses, according to the findings, representing between 500,000 and 2.9mn jobs.
The government guaranteed about £78bn of state-backed loans provided by banks to more than 1.5mn businesses during the pandemic, according to the report published on Tuesday. However, many businesses took out the cheap and easily available loans despite not facing immediate cash flow problems.
The survey found that “one threat to value for money [of the schemes] arose from the removal of measures to target loan guarantees at businesses whose survival or stability was threatened by the Covid-19 pandemic”.
It said the findings suggested that “the removal of targeting measures has led to the public sector assuming the default risk of lending to a large number of businesses that may not have needed support to survive the pandemic”.
It added that this meant companies that took out loans would be more likely to pay back the money than previously expected which would have a positive effect on default rates.
The report was carried out by London Economics and Ipsos into three loan-guarantee schemes — the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loan Scheme (BBLS).
The findings are the first in a series of evaluations into the operation of the schemes by the BBB. The bounce back loan scheme in particular has attracted criticism for its loose checks on borrowers which opened the door to billions of pounds of loans potentially lost to fraudsters.
Previous official estimates have suggested that losses to fraud and default across the schemes could reach nearly £5bn. The report said that it was “still too early to fully assess the level of defaults and fraudulent claims”.
“Had lenders conducted their standard checks on such a volume of applications, it would have created an extensive backlog with smaller businesses waiting significantly longer for a loan during which period the survival of the business may have been at risk.”
But, it added, there was “mixed evidence that the survival of many borrowers was contingent on the level of acceleration of lending decisions achieved”, which could again spark questions on why more stringent checks were not applied to weed out fraud.
The report also flagged “irregularities noted in the lending decisions made by one lender” referring to Greensill Capital, which is under investigation for allegedly abusing the lending scheme for larger companies. It said that the British Business Bank had reduced the allocation to zero to the lender.