Banks and government need to coordinate to recover pandemic loans

As the world emerges from the Covid-19 pandemic, the question of loan repayment has begun to rear its head. Almost all the loans awarded during the pandemic were done so with a government guarantee, meaning the taxpayer is ultimately responsible for the repayment.

The UK’s National Audit Office (NAO) currently estimates that the taxpayer could be on the line for up to £26bn in pandemic loans. To put this in context, the total spending on adult social care in the UK in 2019/2020 was £23.3bn, revealing the potential damage to the public purse if these funds are not recovered. Recent reports suggest the shortfall could be less, though still substantial.

Banks are facing a hangover: after being told to lend this money quickly, they now face the challenge of recovering it. Money that was lent quickly during the pandemic may, on closer inspection, turn out to have been claimed fraudulently. This is an issue that will continue to haunt banks as they look to recover money.

Loans gone bad

It is helpful to define ‘fraudulent’ loans.

First, you have criminals who deliberately claimed money that they were not entitled to via fictitious entities. The scale and speed by which loans were handed out in the early stages of the pandemic meant that there was naturally a moral hazard problem. Despite the banks’ best efforts, there was clearly scope for businesses that shouldn’t have received loans to get them.

This raises the question as to whether banks acted reasonably in making the loans available to some businesses without appropriate checks, and the extent now to which the taxpayer should foot the bill.

In the second case, businesses may have misled the banks. There is a range of reasons behind this — not all of which are intentional. On one hand, borrowers simply may not have been asked the right questions. On the other, those in financial distress could have failed to fully disclose their situation to the bank, or outright lied about their financial position, in order to meet the lending criteria. Additionally, some businesses may not have used their funding as discussed, and instead personally profited or repaid personal debts.

At the other end of the scale, we see valid businesses who requested loans in good faith but are now unable to repay the money. According to the NAO, around 90% of the loans have gone to micro-businesses with turnover below £632,000. Such businesses may be able to repay loans, but will need more time (which is being made available under various repayment schemes). 

Ultimately, the speed and extent of loan repayment will influence the UK’s economic recovery. If the funds are not returned and the government ends up footing the bill, we may see more pressure on government funds in the coming years.

Recovering the money

A coordinated approach among government agencies, and synchronised across all banks, would help make the collection of Covid-related loans more efficient. This is taking place, but a more open and transparent framework would assist all participants in achieving optimal outcomes.

Criminal activities should be targeted first, with banks and law enforcement working in partnership. Fraudsters should be tracked down and prosecuted if necessary, and then bona fide loans should be dealt with accordingly. The government has asked banks to take ‘reasonable steps’ to recover the loans, but so far it is unclear what the process behind this will look like and what support will be provided by the government. It would be beneficial also for company advisors — accountants and lawyers — to know the detail behind the road to repayment and recovery, to best advise struggling businesses who need extra support and guidance.

At this pivotal moment, there is a huge opportunity for the government and banks to work together to recover loans, while also protecting the economy and making sure that businesses are given the time and support they need.

Banks must not forget the high reputational risk that is posed by aggressively seeking to recover loans. We face a repeat of the last financial crisis of 2007-09 where banks were painted as the villains — especially regarding recoveries via special recovery teams and in-branch fraud issues. The political and public interest dimensions are obvious.

In all likelihood, the UK government may soften its position on companies repaying loans, with some companies who borrowed money knowing that they would be unable to repay it being let off the hook. But what the taxpayer will make of this — and the final Covid-relief bill — remains to be seen.

The unknown timeframe around this recovery means that long after the pandemic is behind us, banks will still be shackled to the issues of Covid-loan recovery. Long-term thinking and processes must be put in place, with strong governance and audit trails.

The UK pandemic loan scheme has been an extraordinary system that has not only been replicated by countries across the world, but has also minimised damage to the economy — a testament to the exceptional support offered by the government and banks during the crisis.

Strong leadership and collaboration, an open and transparent approach, and attention to detail will minimise the clear and substantial risk that everyone’s hard work is not wasted.

Chris Philips is managing director at consultancy Alvarez & Marsal.