The Coronavirus Business Interruption Loan Scheme (CBIL) was launched in a fanfare of the Government promising to do whatever it took to support our economy, including providing the staggering amount of £330bn in Government Guarantees to allow banks to quickly restore liquidity to UK companies during the COVID19 lockdown.
So far so good…but the fatal flaw was choosing how to deliver it.
The Government used an existing loan guarantee scheme, the Enterprise Finance Guarantee (EFG), as the vehicle for delivering much-needed loans to companies. After nearly a month, there have only been 36,000 applications and only 16,500 approvals totalling c£2.8bn out of the £330bn available. That amouns to an average loan per company of only £170,000.
Despite the government’s great intentions, the problem is that EFG was a loan of last resort, designed to be slow, careful, measured and subject to strict criteria and due process. In a race to save the economy, it is the equivalent of giving Lewis Hamilton a tractor to win a grand prix.
On the other hand, the Job Retention Scheme (JRS), got off to a flying start. It was designed from scratch, and after a worrying few weeks waiting for the rules of the scheme and the delivery mechanism, it was successfully launched on 20 April with 185,000 companies applying on behalf of 1.3 million furloughed employees on Day 1 and had reached 435,000 companies for over 3 million employees by the end of week one.
It is simply not credible that only 36,000 of those initial 435,000 companies need CBIL. There are thousands of companies which would have applied for CBIL had the process been as simple as JRS.
So what can be done about it? EFG (on which CBIL is largely based) is a system of loans of last resort, further complicated by complex pre-qualification rules. Most of these rules are not fully understood by the banks. For example, EFG could not be used to set up international distribution networks, particularly in the EU, as this was seen as unfair competition financed by a Member State. This very specific exclusion has been widely misinterpreted by some banks to suggest that any company which exports is automatically excluded.
European anti competition legislation is lurking in there too. To cap it all is the requirement of banks to assess how to take the 20% risk onto its balance sheet. My experience is that, almost entirely, except for very small loans, the banks are not lending unless it already had excellent security in place and the borrower had significant borrowing capacity.
The bottom line is that thousands of companies do not get the starting grid in qualifying for a loan through the EFG.
A couple of well-intentioned interim changes were made. Companies without adequate security could apply. This is all very well, but banks are simply refusing to lend in these types of situations as they would end up with risk on their balance sheet, so the applications turn out to be a waste of time. I have several cases where the bank has said that they would lend if personal guarantees were given, but do not want to use CBIL as the criteria (EFG based) are too stringent. So, the drowning businesses are allowed to shout for life vests, but the banks are frightened to give them out in case they end up drowning too.
It was then said the existence of security should not be a hindrance to lending with CBIL. This was an important change too CBIL as it meant loans could be issued to companies who, because of their financial strength, would not have qualified for EFG (and, consequently, not CBIL either). So, the banks can now give CBILs to the ‘strongest’ in the economy who can demonstrate they have collateral but are being allowed, quite rightly in my view, to avail themselves of this extra help – giving life vests to people who have already swum to shore.
It was thought that these changes would see a significant upswing in applications and cash out. At less than 3bn out of £330bn lent so far the figures speak for themselves. It’s not happening.
Thankfully, fixing this mess this is not as difficult as it seems, but requires bold and speedy action. The government should jettison the EFG scheme for CBIL purposes as the scheme will always be doomed by red tape.
Government should take a leaf out of the success of the JRS scheme. Trust companies not to abuse the system. Have them self-certify with the same type of severe penalties as the JRS scheme has (and perhaps even more). This has worked in Switzerland and other countries are copying this.
Increase the Government Guarantee to 100%. Switzerland and others now have done this for ‘smallish’ loans up to c300,000 to £500,000. The UK Government’s announcement today of a bounce-back loan scheme for up to £50,000 is very welcome but, frankly, is not bold enough.
Remove the banks from the audit trail as much as possible for 100% guaranteed loans – if the payment of losses incurred under the government guarantee are subject to the bank having carried out a full credit assessment (as is required by EFG) nothing will ever get processed at the speed it needs to be.
Time is not on our side in this desperate race to save our economy. Having the courage to change the way loans are being offered to companies, would be an inspired move that would be welcomed across the business sector.