Banks may outsource the recovery of billions of pounds of state-supported loans to debt collectors on the grounds that the task will be too onerous to manage directly.
Lenders have been talking to the government about shifting bounce back loans — standing at £38 billion to 1.3 million small firms — to agencies.
Government officials have contacted debt collection companies including Arrow Global to assess whether they could take on the loans to seek repayment, for which they would receive a fee. Unpaid debts would return to the banks, which would then claim on the state guarantee attached to the loans.
Bank executives believe that the move is necessary given the huge flow of loans and anticipated problems with repayments. Bounce back loans, of up to £50,000 for small businesses, could create a £26 billion bad debt hole, the National Audit Office said last week.
Bankers believe that if they try to recover the loans themselves, each lender would have to hire hundreds of staff and build dedicated centres. They want to agree an approach with government for dealing with the loans in the hope of avoiding a repeat of the Royal Bank of Scotland’s Global Restructuring Group scandal after the financial crisis, which led to investigations and criticism over the treatment of small businesses.
A senior banking source said that lenders wanted to agree a uniform “light touch” approach to the recovery process. This needed to be discussed with the government “because what we don’t want to do is invalidate the guarantee in any way”, the source said.
Banks are considering whether a new agency could manage the process or if the loans could be moved to a state-run bad bank. Setting up a panel of debt collectors that sign up to a code of practice but with lenders retaining responsibility for customer treatment is seen as a more workable idea by some.
There are concerns about how many customers will be in vulnerable groups because of the expected rise in unemployment and rising Covid-19 cases.
The risk that some loans have gone to fraudsters is “very high” because of the minimal levels of eligibility checking, according to PWC, which reviewed the scheme. A senior financier close to the situation said it was a “minefield”.
Chris Leslie, chief executive of the Credit Services Association, the debt collectors’ association, said that policymakers would have to be careful, adding: “There are good examples of best practice that the Treasury and British Business Bank will want to consider.”
Many believe there is a row brewing between banks and the government over the loans, which carry a 100 per cent taxpayer guarantee that lenders can claim only once they have tried to recover the money. The collection process is yet to be finalised, despite the loans being set up five months ago. The first repayments are due in May.
The Treasury spokesman pointed to measures announced last month to make it easier to repay the loans, such as extending the repayment term from six to ten years, switching to interest-only or pausing entirely for six months.