UK government could lose billions to loan scheme fraudsters

The Bounce Back Loan Scheme was announced on 27 April to quickly provide loans of up to £50,000 to registered and unregistered small businesses to support their financial health during the COVID-19 pandemic.

However, following an investigation into the scheme, the National Audit Office (NAO) has said that the government faces a potential loss of £15 billion to £26 billion through businesses not being able to repay the loans and fraud.

The Department for Business, Energy & Industrial Strategy (BEIS) and the British Business Bank expect the scheme to lend £38 billion to £48 billion by 4 November, substantially exceeding the assumed £18 billion to £26 billion when it launched.

As of 6 September, HM Treasury data showed that the scheme has delivered more than 1.2 million loans to businesses, totalling £36.9 billion, with around 90 per cent of these loans going to micro businesses.

But, the less strict eligibility criteria imposed by the government compared with other COVID-19 related business loan schemes presents credit risks as it increases the likelihood that loans are made to businesses that will not be able to repay them, leading to losses of taxpayers’ money, the watchdog said.

“With concerns that many small businesses might run out of money as a result of the COVID-19 pandemic, government acted decisively to get cash into their hands as quickly as possible,” said Gareth Davies, head of the NAO.

As a result of credit and fraud risks, BEIS and the British Business Bank have made a preliminary estimate that 35 per cent to 60 per cent of borrowers may default on the loans, based on losses observed in previous programs that are most similar to the scheme.

Assuming the scheme lends £43 billion, this would imply a potential cost to government of £15 billion to £26 billion.

“Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct,” said Mr Davies.

“Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse.

“It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.”

Over the coming months, the extent of losses due to fraud will become clearer, but the full extent of losses, both credit and fraud, will not emerge until the loans are due to start being repaid from 4 May 2021.