UK banks fear that up to 800,000 businesses could go bust in the next year if they are unable to defer repayments on government-backed loans.
The lending industry is proposing a student loans-type scheme, where coronavirus loans can be converted into a tax debt repayable over a decade.
Like student loans, the money would only be repayable when and if the businesses can afford it.
Banks want the scheme to be administered by HM Revenue and Customs.
HMRC would have the operational horsepower, existing relationships with, and adequate knowledge of, companies to manage a programme of this scale.
Banking industry lobby group TheCityUK is proposing to set up a “UK Recovery Corporation”, through which companies could convert their short-term debts into a longer term financial obligation to HMRC and pay back the debt when they are making enough money – a so-called contingent tax obligation.
This, the banks argue, would be far simpler and faster to arrange and administer, than the UK government taking direct ownership stakes in hundreds of thousands of companies.
There has been widespread acknowledgement that many firms will struggle to repay the £46bn in loans taken out so far, under government schemes designed to help business survive the coronavirus crisis.
Government guarantees of between 80-100% are to the lender, not the borrower. This means that the banks may get repaid by the government, but companies in trouble will still be in default and therefore likely to go bust.
Put simply, government guarantees to lenders will not save the firms doing the borrowing, or their employees.
The appeal to the banking industry is that they will not incur the reputational damage of having to pursue small businesses for repayment for loans that are already largely guaranteed by the government.
And the government will not be left with accelerated losses when the banks write off the loan and call in their government guarantees.
If such a scheme were to be introduced, firms would be able to defer debt interest repayments that start coming due in March 2021, at a time when they will have already faced a backlog of VAT and business rate bills, plus the expiration of the job retention scheme, which has seen the government pay 80% of over 9 million people’s wages.
In time, say the banks, these IOUs from business could be parcelled up and sold to investors, much like the bundles of student loan debt and bad loans from the financial crisis have been, thus taking it off the government’s hands.
The government is already on the hook for most of this debt through their coronavirus loan guarantees to the banks. The banks would also relish the opportunity of earning any fees associated with arranging these sales.
The Treasury described the proposals as “a useful contribution to discussions on how businesses can be best supported through this difficult time”.
Debate over government intervention
However, on Tuesday, the Chancellor said the bar for government intervention was “very high” and should be “exceptionally rare and only in situations where companies have some strategic value, clearly have a long-term viable future and where the creditors and shareholders have shared in the burden and are not just looking for a free ride on the taxpayer”.
The financial services industry counter that this would not amount to a direct ownership stake and that the government has already clearly recognised that a jobs apocalypse is on the horizon.
Without a means of converting a short-term debt emergency into a longer-term repayment plan, it will arrive by March next year.
These proposals are unlikely to be the final answer. They could be subject to abuse – like any large and fast intervention. For example, there should surely be some strings attached so that firms could not pay their own shareholders fat dividends having parked their debts for the time being.
Many will also scoff at the nerve of the banks to try and offload the problem from their balance sheet to the taxpayers after what happened a decade ago. But to be clear, the government has already guaranteed most of these debts. It’s already the taxpayer’s problem.
Sooner or later the government will be left with a massive bill for this crisis. The banks argue that the later the bill comes, the smaller it will be for the taxpayer and the smaller the damage to the social fabric of the UK.