The UK’s emergency Covid loans will hit their one-year anniversary dates in March, marking the end of the 12-month interest-free period and sparking worries banks might jack up rates too far.
Some industry observers predict a disastrous impact on the economy if banks begin to set crippling repayment rates for businesses.
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The chancellor of the exchequer launched the scheme on March 23 last year for businesses hit by the lockdown, pledging to pay the interest for the first 12 months. Taxpayers are on the hook for 80% of the loans that aren’t repaid.
As taxpayer support is withdrawn, some experts have predicted that the economy will be devastated this spring.
“It’s terrifying and there will be a reckoning from May and June,” said Richard Fleming, European head of restructuring at Alvarez & Marsal. “We’ll see some collapses of big names, most certainly, you’ll see it in restaurants, retail, travel and tourism.”
The furlough scheme ends in April
Banks have issued £35m of loans at rates of more than 14.99% – even 34.9% in one case – to firms shuttered by the pandemic, Treasury documents show.
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By GlobalDataOn top of the coronavirus loan repayments starting from March for hundreds of thousands of businesses, the furlough scheme paying 80% of wages will be withdrawn on 30 April.
The scheme, set up to support those whose jobs have been affected by the coronavirus pandemic, was previously extended from its initial date of 31 October 2020.
The only way to head off economic collapse is for government to prop up businesses for longer, experts have argued.
Passing on the benefit of the loan guarantee
Banks had promised that they would pass on the benefit of the Government guarantee, which in theory should enable them to lend at lower costs.
But an interest rate cap of 14.99% had to be introduced in June over fears banks might hit businesses with sky-high rates.
Lenders that joined the scheme before the cap were still allowed to hand out loans at any rate they chose. The highest rate that has been charged is 34.9%.
Overall, loans worth a total £19.6bn have been issued under the scheme, at an average rate of 5.6%.
A chorus of protests
“It’s extraordinary that some of the loans have been made out at such rates,” said Lord Myners, the ex-City Minister who masterminded the bank bailouts in 2008.
“Are you really helping businesses by lending them money at 14.99%? It beggars belief, these are usurious rates. And these loans will definitely need to be rolled forward if the repayments start soon,” he added.
Labour’s Siobhain McDonagh, who sits on the Treasury select committee of MPs, has written to the Chancellor to protest. She said:
“These are the kind of rates you would expect on a credit card. Now is the time to pull together to support British businesses, not load them up with debt that is entirely unreasonable.”
Banking trade body UK Finance said the “vast majority” of loans have been issued at a rate of less than 14.99%. A spokesman said:
“Lenders have agreed not to charge any fees for setting up the loan or for early repayment but will of course bear administrative and funding costs.”
