Predicting future default on the Covid-19 bounce back loan scheme: The 46.5 billion question

The UK has had a commitment to loan guarantee schemes since 1981
when it introduced the Small Firms Loan Guarantee (SFLG) scheme to
address access to debt finance issues for smaller firms. Over the last 40
years its’ support has been unwavering and in the Covid-19 crisis it once
again turned to loan guarantees as a means of supporting smaller firms
through the crisis induced slump in trading activities. Of its three core
Covid-19 guarantee schemes, the Bounce Back Loan scheme was the
most numerous with 1,531,095 loans issued amounting to a total of
£46.5bn in lending. The BBL scheme provided a 100% capital guarantee
on loans between £2,000 and £50,000, and firms were allowed to borrow
up to 25% of their trading income, with a fixed interest rate of 2.5% of
which the first years interest was paid by the government to the lending
bank. Our findings suggest that the government losses may range
between £7bn and £12bn depending on the underlying assumptions. But
we estimate Covid-19 guarantee schemes may have protected 118,639
businesses and 1,117,849 jobs. Looking to the future we suggest that a
new loan guarantee is justified which is more like the former SFLG than
the restrictive EFG as more than 1 million small businesses will be
heavily indebted and unable to borrow to invest in future growth
opportunities. This would support the 'levelling-up' agenda and help
prevent a post-Covid-19 low investment - low growth scenario.