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More CBILS loans will go into default and cost of the taxpayer

Government was right to allow unregulated lenders to offer Coronavirus Business Interruption Loan Scheme (CBILS) loans, but more loans will go into default at the cost of the taxpayer, says David Hough.

In March and April last year many businesses saw their cash flow disintegrate and Government schemes needed to be put in place quickly to prevent the severe impact of high-profile collapses. CBILS provided much needed access to finance, but the taxpayer ultimately bears most of the risk and will absorb the cost to the Government of businesses that collapse before their loans are repaid.

Via the British Business Bank the Government permitted a number of unregulated lenders to participate in these schemes, with the Government providing an 80% taxpayer-backed guarantee. The collapse of Greensill Capital brings the taxpayers’ exposure to these loans into stark focus.

Unfortunately, there will continue to be businesses that have drawn CBILS loans that default, due to the continued impact of the pandemic, at the expense of the taxpayer. However, had the British Business Bank not permitted certain unregulated lenders to participate then many companies would never have received the support they needed. Regulated banks were often slow to offer loans through the schemes, particularly outside their existing client base, which would have left many businesses with nowhere to go. Therefore, allowing other lenders to offer alternative finance was a necessary move by the Treasury at that time.

Lessons need to be learned as well, given the speed at which large amounts of taxpayer money were dispersed into companies that were not able to pay it back. Stricter accreditation processes should be implemented by the British Business Bank with respect to the new Recovery Loan Scheme so that as well as continuing to check lender capital adequacy, viability and track record, the Government guarantee ceases to apply if certain criteria are breached, offering some protection to the taxpayer. For example, multiple loans to related entities should be forbidden. Public disclosure of recipients of large loans at the point of issue, along with the lending party, would also allow for greater taxpayer scrutiny without undermining the ability of businesses to access funds as quickly as they need to.

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