The Governor of the Bank of England intervened on the day the furlough scheme was extended after data showed that only £1bn had reached small businesses.
On Thursday, Andrew Bailey warned that unless the small business emergency loan scheme is boosted immediately the economy could suffer disastrous long-term damage.
The Governor instructed the UK’s biggest banks to ‘put their backs into it and get on’ with lending more money to SMEs through the state-backed rescue programme. This comes as the latest figures show only around 6,000 companies have benefited, despite 300,000 expressions of interest.
He also took the Treasury to task, saying it must be willing to change the scheme’s rules so that money can be given more quickly and targeted where it is needed. As the Governor spoke, ministers extended the furlough programme intended to save the jobs of workers at risk of redundancy.
The programme will avoid mass layoffs in one month’s time by paying out until the end of June instead of May. Mr Bailey warned that the consequences would be ruinous if the small business loan scheme failed to deliver the money available. And that the shortfall must be addressed, otherwise it would destroy people’s livelihoods and damage the economy.
Loans not being approved quickly enough
The loan scheme, announced last month, provides access to loans, overdrafts, invoice finance and asset finance of up to £5m of ultra-cheap credit for up to six years for SMEs with a turnover of less than £45m. The Government will also make Business Interruption Payments (BIP) to cover the first 12 months of interest payments and any lender-levied fees.
Businesses can apply directly to their bank, although the British Business Bank (BBB) website includes further details regarding the lenders signed up to the scheme and what is needed to apply.
80pc of a lender’s losses will be guaranteed by the taxpayer, in the event that they fail to repay the cash. Although attracting praise initially, the scheme has since been plagued by criticism of loans failing to be approved quickly enough.
While banks have been accused of inertia, industry sources in turn have turned their fire on bureaucracy at state-owned administrator, the British Business Bank. According to banking trade group UK Finance, only £1.1bn of credit from a pot of up to £330bn had been given out as of last Tuesday.
In stark contrast, the US has already almost depleted a $350bn (£280bn) pot and Switzerland’s banks have been successful in handing out in excess of 76,000 loans worth around £12bn in a matter of just a few days.
Delay caused by creditworthiness checks
Mr Bailey added that Chancellor Rishi Sunak must take a lead in solving the problem because the requirement to check carefully every loan application to ensure the borrower is creditworthy is the main reason for delay. This is something that poses a serious challenge when banks are faced with a sudden huge increase in loan applications.
Not only is it difficult to form an opinion of the current creditworthiness of small firms, he said, but it is especially problematic to second-guess what the creditworthiness will be once the pandemic is over. If much time is spent on this particular aspect, few applications will be processed.
On the other hand, a simpler process with a ‘different risk appetite’ could be adopted. As the loan scheme is a Treasury initiative rather than a Bank of England project, it is the Chancellor’s responsibility to make the decision, even though it would put more public money at risk at a time when expenditure is close to wartime levels.
In order to avoid a mountain of new debt overwhelming small businesses, he added, it is feasible that they could just be given more grants.
Early last week, the Chancellor emphasised that the loans scheme is under review continously although he is concerned about risking more taxpayers’ money. In the interim, Mr Bailey responded by saying that the projection by the Office for Budget Responsibility (OBR) of a 35pc collapse in GDP in the three months to June was not without validity.