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Govt's SME loans may 'damage fabric of economy’

Govt's SME loans may 'damage fabric of economy’

The government’s bounce back loans for the smallest companies could “damage the fabric of the economy”, experts have warned, as the tally of cash borrowed through the 100 per cent guaranteed scheme hits £21bn.

Giles Wilkes, senior fellow at the Institute for Government, warned MPs that guarantees and subsidised loans from the state could damage the economy by keeping companies alive “that should not be kept alive”.

Speaking at a Treasury select committee hearing yesterday (June 9), Mr Wilkes said the government had a “massive problem” when it came to the ongoing issues of the loans awarded to small to medium sized businesses to assist them through the coronavirus crisis.

He was responding to Conservative member for Central Devon and chairman of the Treasury select committee, Mel Stride, who asked the panel whether the “huge volume of businesses saddled up with debt” at “exactly the time we need them to grow the jobs we desperately need” was a problem going forward.

Mr Wilkes said: “As time passes, guarantees and subsidised loans from the state can damage the fabric of your economy if you simply keep companies alive that should not be kept alive.

“You’re sending money away you won’t get back. I would raise a flag over the speed at which the bounce back loans have gone out the door.”

Last week (June 2) figures from the Treasury showed the Bounce Back Loan Scheme had paid out more than £21bn since its launch at the beginning of last month, with nearly 900,000 claims having been made under the scheme.

Mr Wilkes said: “It’s an incredible red flag when something sells so quickly. I don’t think anything has sold so quickly previously. Some three quarters of a million companies and £20bn straight out and we’re already talking about absolutely massive bad debts.

“It’s very rare state money has gone out so quickly without something going wrong. It must be the lack of commercial scrutiny that the private sector has needed to apply to these loans.”

The BBLS is intended to help the smallest of businesses with loans of between £2,000 and £50,000. The government will pay the interest on the loan for the first year and there will be no capital repayments owed for 12 months.

Through the scheme, the government provides lenders with a 100 per cent guarantee for the loan, meaning businesses eligible for the scheme do not have to go through the same credit checks required for the Coronavirus Business Loan Scheme, which offers an 80 per cent guarantee.

Chancellor Rishi Sunak had previously warned loans with a 100 per cent guarantee would mean “not just the government taking the risk, but actually all of us”.

But pressure to alleviate concerns the smallest businesses in the UK were potentially slipping through the net of the government’s economic response to the pandemic resulted in the BBLS being introduced last month.

The Treasury has been approached for comment.