UK banks warn of slow take-up for state recovery loan scheme

Senior bankers and business leaders have warned that take-up of the government’s new Recovery Loan Scheme has been slow, blaming more stringent checks and higher interest rate charges compared to other pandemic support schemes.

Applications were in the “low thousands” in the first week, according to bankers, with fewer again accepted as potential borrowers. Many of these applicants were existing users of government coronavirus loan schemes, one added.

One of the largest UK banks received fewer than 500 applications in the first two days after the scheme began on April 7, according to a person with knowledge of the situation. They approved close to 2,000 applications in the same period when the bounce back scheme opened last year.

The Recovery Loan Scheme, announced at the Budget in March, provides 80 per cent guarantees for borrowing of up to £10m for individual businesses and up to £30m across a group.

The aim was to replace financial support that helped sustain many businesses forced to cease trading during the lockdown with more than £75bn of loans to 1.6m borrowers underwritten by the government before these schemes ended last month.

There is a perception gap for prospective customers — people are going to come and expect a bounce back loan, and that’s not what it is

At launch, chancellor Rishi Sunak said the RLS “will ensure that businesses continue to have access to the finance they need as we move out of this crisis”.

Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said: “This is a really important scheme, but there appears to be low take-up at the outset and some small businesses saying they are struggling to apply.” 

He urged the government and banks to review the first month of operations to see if the application process could be streamlined or the minimum loan threshold of £25,000 reduced. 

Several bankers said lending through the RLS was always intended to be a “tiny proportion” of the amounts provided through the first rescue schemes, but some suggested the government had misrepresented the purpose of the RLS by comparing it to the exceptional terms of the bounce back loans.

“There is a perception gap for prospective customers — people are going to come and expect a bounce back loan, and that’s not what it is,” said one person involved in the RLS.

The bounce back loan scheme offered government guarantees for loans of up to £50,000 on particularly generous terms with no interest rate for the first year and only light credit checks. More than £46bn of bounce back loans were guaranteed by the government.

In contrast, the RLS carries interest rates of up to 15 per cent, extensive checks on borrowers’ financial history and viability, and demands for personal guarantees that put the borrower on the hook for any losses. 

Officials were keen to return the market to more normal conditions given that previous schemes had skewed the market away from commercial lending, according to people involved in the talks to create the RLS.

Several bankers said demand for additional debt is low because many companies have already borrowed heavily through the original pandemic support schemes. Lenders saw a surge of last minute applications for both bounce back loans and the Coronavirus Business Interruption Loan Scheme (CIBILS) before these programmes ended. 

Supporters are optimistic that RLS volumes will pick up, particularly when more companies are accredited to lend through the scheme.

Only 18 lenders, mainly traditional high street banks, were accredited when the RLS launched at the start of April compared to more than 100 lenders that had been able to provide CBILS support. The British Business Bank is now in talks with specialist lenders such as Funding Circle to join the RLS.

UK Finance, which represents large UK banks, said: “Many businesses currently have a surplus of deposits over borrowing and others have taken on additional debt and will wish to keep their borrowing to manageable levels.”

It added that in recent months, more lending has been provided outside the government-guaranteed schemes than within them.

The Department for Business, Energy and Industrial Strategy said: “[The RLS] is designed for those businesses able to take on and manage additional borrowing. We have always been clear that debt will not be the right answer for all businesses.”