Up to three million jobs and 800,000 small and medium-sized businesses are at risk if companies cannot defer repayment on up to £46billion of Government-guaranteed loans and debt, experts warned today.
Banking lobby group TheCityUK has said recapitalisation of these loans is 'essential' to protect SMEs and businesses will need help tackling debt which could 'hold them back or drag them under'.
Their report calls for the creation of a new student loans-style scheme, where businesses could convert unmanageable loans into means-tested tax liabilities.
Coronavirus loans would likely be paid back over ten years - and payments wouldn't begin until a business could afford it, meaning like many student loans they may never be paid back at all.
Banks want the Treasury and HM Revenue and Customs to run the scheme with the taxpayer swallowing any of the debt not handed back by companies.
As ministers ordered Britons to stay at home unless they had to shop for food in March, Chancellor Rishi Sunak promised to do 'whatever it takes' to support the companies whose business would be decimated by the decision.
It meant launching three Government-backed loans, the coronavirus business interruption loan scheme (CBILS), a similar scheme for larger businesses called CLBILS, and the bounce-back loans, which help out some of the smallest companies.
The Treasury is backing more than 80% of the loans - up to 100% - but the guarantees are to the lender rather than the borrower, so companies unable to meet the repayments of their share of the loan would still default.
Repayments are due to begin in March 2021, but TheCityUK warned there was a need to 'act quickly' given furlough schemes and rent deferrals are due to come to an end.
The UK Recovery Corporation, as proposed by the group chaired by HSBC chairman Mark Tucker, would convert the loans into 'new products allowing them to manage their debt in a more sustainable way and achieved without being put into default'.
The proposed Business Repayment Plan, for those using the Bounce Back Loan Scheme or CBILS loans under £250,000, would see the loan balance turned into a tax obligation and repaid through the tax system, much like student loans are repaid now.
Larger loans of up to £1 million under the CBILS would be converted into an unsecured loan or preferred share capital.
Sir Adrian Montague, Chairman of TheCityUK's leadership council, said: 'Covid-19 is a 100-year storm which has caused untold economic damage.
'The government's support schemes have been the essential sandbags holding back the flood, protecting businesses and saving jobs.
'However, with tough trading conditions forecast to remain, paying back these loans will be challenging for many SMEs. To secure a strong recovery, action must be taken now to help them sustainably retrench, rebuild and return to growth.'
Omar Ali, chairman of the group's recapitalisation technical working group said 'hundreds of thousands of businesses' could struggle with debt the have built up during the pandemic.
He added: 'Our analysis suggests that some sectors may enter into difficulty as early as autumn this year.
'That is why taking action now is vital if we are to help businesses get back onto a stable footing as we emerge from the pandemic, and will ultimately support the UK's economic recovery and fuel its future return to growth.'
The taxpayer could be saddled with a £34bn bill as thousands of loans handed out under emergency Covid schemes turn sour.
Treasury figures show £46.3bn has now been lent to 1.1m firms, including £31.7bn lent to 1m of the UK's smallest companies through the Bounce Back scheme.
But the UK's budget watchdog has said losses under these taxpayer-backed schemes could hit £33.7bn in the worst-case scenario, as the economic downturn caused by the pandemic bites.
It added that an eye-watering 40pc of Bounce Back borrowers are expected to default. Experts fear that the debt pile will become a millstone, and hold back a UK economic recovery as firms try to rebuild.
The new head of the Office for Budget Responsibility (OBR), Richard Hughes, said: 'The longer the crisis goes on, the more likely it becomes that Government-guaranteed loans become less of a facilitator of the recovery and more of a burden, because firms have built up large stocks of debt which they will struggle to write off. The more that debt is a burden on companies, the less they will invest.'
Speaking to MPs on the Treasury Committee, he said a massive write-off of the toxic debt might be the only way to save the economy from stagnation.
The OBR thinks that by the end of September, six months from when Chancellor Rishi Sunak (pictured) began to launch emergency loans, banks will have lent £76bn across the various programmes.
Of that, £53bn will have been handed to small firms in Bounce Back loans, while the rest to slightly bigger firms under the Coronavirus Business Interruption Loan Scheme (CBILS) and very large companies under the scaled-up CLBILS.
As companies struggle to pay off debt, in the best-case scenario the OBR thinks the taxpayer will be left to foot an £8.6bn bill.
Under its central or most-likely scenario, this rises to £16.9bn.
But the losses spiral to £33.7bn in the worst-case scenario in its fiscal sustainability report.
Most will flow from the Bounce Back scheme, since this is the largest and carries few conditions regarding the viability of the business borrowing the money. The Government has also agreed to bear 100pc of any losses which banks suffer under the Bounce Back scheme when borrowers fail to repay the loans, compared to 80pc under CBILS and CLBILS.
Lobby groups and economists want the Government to adapt the way emergency loans are repaid, to take the pressure off firms and allow them to thrive.
Tej Parikh, chief economist at the Institute of Directors, said: 'Unless we restructure repayments, directors may find it difficult to invest, and this will hold back the economy as a whole. One way the Treasury could ease the load would be by converting loans to a student loan-style system, where firms pay back based on the profits they make.'
Hughes suggested a similar approach. He said repayments could be linked to revenue, and any amount left after a certain period would be written off.
Britain's banks are preparing for up to 50pc of Bounce Back loans to turn sour. Many fear their reputation could be battered if they take a heavy-handed approach to pursuing the loans.
Official data fails to show true extent of jobs crisis, says analysis firm
Britain's official unemployment figures are masking the 'true scale of joblessness', a think tank warned today.
The Office for National Statistics; latest figures say that 34,000 more people were out of work - taking the total to 1.3million.
But the Resolution Foundation has said that the 23 per cent drop in average hours worked from the start of lockdown to the end of April is far more telling.
Resolution Foundation chief economist Mike Brewer said: 'Britain is in the midst of an unprecedented economic shock that is profoundly affecting millions of people's jobs.
'Unemployment is forecast to hit 4 million for the first time ever. And yet our official data is failing to show the true extent of this jobs crisis.'