Why Rishi Sunak can’t let banks fail us now
Small and medium-sized businesses have performed miracles to survive Covid-19. But many find themselves saddled with debt, and now face the prospect of lending restrictions from banks.
The strain this will be causing for businesses and mental stress on bosses is vast. Credit tightening is occurring most viciously within hospitality, but it will be an issue for many sectors in coming months and years.
The Government must step in and engage in further creative thinking and pressure.
It is absolutely the responsibility of the Treasury to get banks lending, not only turf out more taxpayer cash. For, as we know from the global financial crisis, a recovery suffocated by tight credit will be no recovery at all. Indeed, why spend all that money on furlough to let businesses fall at the last hurdles because of the banks?
Here is the Standard’s advice to Rishi Sunak on what he can do next to ensure banks — bailed out in the last crash — are doing their job to help the UK’s economic recovery.
1. The Government should pressure banks to continue lending and supporting businesses, so they can make opening and continue as employers. However, the years following the crash demonstrate that persuasion alone cannot convince banks to make what they consider to be risky loans.
2. The Government should introduce plans that enable banks to borrow at cheaper rates, to then lend to SMEs. Two schemes from the recent past are instructive.
The National Loan Guarantee Scheme helped businesses to access cheaper finance by reducing the cost of bank loans under the scheme by one percentage point.
Meanwhile the Bank of England’s Special Liquidity Scheme improved the liquidity position of the UK banking system by giving financial institutions time to strengthen their balance sheets.
3. Much more radically, why doesn’t Rishi Sunak launch Re-Start grants instead of just adding to the size of bounce back loans as some are calling for. This has the right ring to it and be entirely aimed on businesses proving this loan or grant will get them open and trading again.
4. Finally, there is the most ambitious option of all — cancelling debt. The truth is that much of it, already guaranteed by the Government, is not expected to be repaid. This is more unlikely.
As of January 24, the Government had lent over 1.4 million businesses a total of £45 billion under the Bounce Back Loan Scheme alone. Due to credit and fraud risks, it estimates that between 35 to 60 per cent of borrowers may default on the loans.
Forgiving all loans will be expensive. But so too would allowing hundreds of thousands of SMEs to go bankrupt over the next year as they struggle with huge debt or are prevented from expanding, because they either cannot afford debt repayments or get investment.
If Rishi Sunak really wants to turbo-charge the UK economy, he should use next week’s Budget to ensure that British businesses get access to the credit and cash flow they need to lead our national recovery.
Who wins the arguments on financial recovery will also win the political battle in years to come.