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UK Removes Guarantees on £1 Bn Covid Loans. Here’s Why It Matters

The United Kingdom has taken a significant step by removing the guarantees on £979 million ($1.2 billion) worth of loans extended to businesses during the Covid-19 pandemic, Reuters reported on Wednesday.

Though the government’s decision only impacts a small percentage of all loans, it could result in losses for lenders in the event that the loans are not repaid. Meanwhile, there is pressure on the Conservative administration to lower the losses from its Covid loans because of complaints that the borrower checks were insufficient and the anti-fraud procedures were put in place too late.

As per the Reuters report, British Business Bank has already removed state guarantees from 10,786 loans as of October 11, according to figures obtained through a Freedom of Information request.  

A spokesperson for the UK’s business department said that lenders have been engaging with British Business Bank over the loan schemes. These discussions revolve around the question whether it would be suitable to eliminate any loans from the guarantee.

The UK Finance, a lobbying group representing the industry, pointed out that in some cases, lenders have voluntarily removed loans from the guarantee, even when the guarantee might be valid.  

This action places the full burden of potential losses on the lenders, ensuring that taxpayers are not exposed to any further financial risks. A breakdown of the removal of state guarantee loans by lender, however, was not disclosed, according to Reuters’ report.  

In response to the economic challenges brought about by the pandemic, the UK government established three government-guaranteed loan programs in the first half of 2020, with an aim to support businesses impacted by the Covid-19 crisis.  

These programs included the Bounce Back Loan Scheme, which provided 100 per cent guarantees on loans to smaller businesses for rapid access to financing. While these loans were intended to support businesses swiftly, they have faced criticism for the high levels of fraudulent activity.  

In contrast, the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme, targeting larger companies, received 80 per cent guarantees from the UK government and have experienced considerably lower levels of fraud.  

Source: WION