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Banks under fire for delays in state-backed loan scheme as UK widens its scope

The British government has expanded its coronavirus business loan scheme to include bigger companies amid calls from the banking industry for it to provide 100% guarantees for loans.

U.K. Finance Minister Rishi Sunak extended the existing scheme so that companies with a turnover of more than £45 million will be able to apply for up to £25 million of finance, while those with a turnover of more than £250 million will be eligible for up to £50 million in funding. Under the scheme the government guarantees 80% of the loan banks still carry the remaining 20% of the risk.

SNL Image

RBS has provided the majority of loans under the British government's scheme to help businesses.

Photo: Royal Bank of Scotland

This is in addition to the existing Coronavirus Business Interruption Loans Scheme that offers state guarantees on 80% loans up to £5 million, while the Bank of England COVID Corporate Financing Facility aids investment grade companies.

"We’ll continue to work with the financial services sector to ensure that our £330 billion of government support through loans and guarantees reaches as many businesses in need as possible," said Sunak.

Total lending under CBILS has now reached £1.1 billion, said UK Finance on April 15, which represents the banks, with 6,020 loans approved so far, more than double the number that had been approved a week previously, out of a total of 28,460 applications.

The scheme provides loans of up to £5 million with no interest payments for the first 12 months and no capital repayment for the first six months for businesses with a turnover of up to £45 million.

Lenders have been criticized for being too slow to approve the loans and financial technology companies have said they are keen to help disburse the funding.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Companies eligible for the loans must also have been creditworthy at the end of 2019 and must be judged capable of paying back the loan when the coronavirus crisis is over — factors that are causing problems, said Mike Cherry, chairman of the Federation of Small Business.

"While one in five formal CBILS applications are approved, the major banks claim their approval rates for standard commercial loans are many times higher than that. These loans are state-backed, so approvals should be higher still. There’s still a lot of work to do."

Cherry also said the average value of a CBIL loan is £185,000 and demanded assurances that a fast-track process for loans under £30,000 is on the way.

Royal Bank of Scotland Group PLC confirmed it has supplied 70% of all loans made under CBILS so far. The bank is still majority-owned by the taxpayer after being bailed out in the financial crisis and said it is the only lender so far to provide loans for less than £5,000.

Andrew Harrison, head of business banking at RBS-owned NatWest, said providing smaller loans was crucial.

"Our CBILS loans start as low as £5,000 — there is a real need from the smaller business customers and for those not wanting to take on more debt than they need to," he said.

Differing approaches

The U.K. government loans are different to schemes in Germany and Switzerland, which offer 100% guaranteed loans to businesses.

Stephen Jones, CEO of UK Finance, told MPs on the Treasury Select Committee who criticized the British scheme that the German and Swiss schemes were simpler than the U.K. version where banks had to check that businesses could repay the loan since they themselves carried 20% of the risk.

"The CBIL scheme as designed by the U.K. government is a very different one from the German and Swiss schemes, which are both 100% guaranteed schemes. In that context, therefore, the credit assessment required by banks in deploying the money is much simpler. In the U.K. scheme, we have to decide as banks, as participants in the scheme: was the business viable on 31 December 2019? Does it have the capability, after the crisis, to repay the debt that it is proposing to take on?" he said.

Jones said the backlog was for loans of under £25,000 and he said banks could issue these loans faster if the government did not require that lenders take on 20% of the risk.

"Were the government to want to support more businesses, including those that might not otherwise be able to repay debt after the crisis, it might be possible to change that guarantee level in the scheme. Banks would then not be required to undertake a full credit assessment," said Jones.

The opposition Labour party has called for the loans to given a 100% government guarantee.

The government has also said it recognizes that many start-up and early stage companies face challenges and is working with industry to offer further ways of offering support.

'In the red'

The FSB's Cherry said support for early stage businesses was vital.

"The question of support for early stage, loss-making start-ups remains a pressing one. The list of businesses that spent their early years in the red only to go on and be great successes is as long as your arm. They must not be abandoned."

Jones raised the possibility of lenders taking equity stakes in such firms.

"Equity will also be required for those businesses that do take debt on to survive the crisis but it turns out they do not have the financial strength as they come out of the crisis to support that debt," he told MPs.

The Financial Times reported that the government is considering a scheme to offer businesses convertible state-backed debt to be matched by funds from venture capital backers.