An explosion in government-backed lending is forecast to reach £123bn ($156bn) by the second quarter of 2021 leading to as much as £36bn in "unsustainable" toxic loans.
That is the verdict of a report due to be published tomorrow by lobby group TheCityUK, seen by The Sunday Times.
Bank of England governor Andrew Bailey has been alerted to the findings which predict COVID-19 loans to small businesses could impede the country's economic recovery.
It is estimated that between £32bn and £36bn of lending will be "unsustainable" as firms struggle to meet loan repayments, preventing them from growing.
The report, overseen by Aviva chairman Sir Adrian Montague, addresses how to support 250,000 UK companies struggling financially due to the coronavirus pandemic.
Businesses are currently turning to three government-backed initiatives — the bounce back loan scheme (BBLS), the coronavirus business interruption loan scheme (CBILS) and the scheme for larger businesses, CLBILS.
While lending via these schemes currently stands at £27bn, this is expected to rise to £123bn by the second quarter of next year.
TheCityUK report outlines a series of ideas to reduce the debt burden on companies, including exchanging troubled CBILS for preference shares, or swapping BBLS for contingent tax instruments. These might operate in a similar way to student loans and be repaid only when certain payment thresholds are reached.
The Treasury is also considering plans to get more pension fund money into private businesses by changing the rules on allocation of defined contribution scheme funds, claims The Sunday Times.
Currently pension funds are restricted in investing in private equity and venture capital funds because of high fees, but government proposals could allow greater exposure to private companies.
Figures released on Friday are set to show that UK GDP contracted by an unprecedented 18% in April, after March’s 5.8% decline.