Treasury and U.K. Banks Make Plans for Covid Bad Debt, FT Says

(Bloomberg) --

The Treasury is in talks with the U.K.’s largest banks about a plan to tackle billions of pounds of bad debts expected under the government’s Coronavirus loans program for small businesses, the Financial Times reported.

Part of the discussions centers on a common code of conduct to deal with bounce-back borrowers, which could include guidance on when and how to extend terms automatically, the FT said, citing sources it didn’t identify. One option one the table is whether bad loans could be extended for as long as a decade but banks are pushing back strongly, wary of the greater risk, according to the FT.

The talks highlight concerns about getting borrowers to repay debts after the government took unprecedented measures to support pandemic-hit businesses. More than a million small companies have borrowed 33 billion pounds ($42 billion) in two months under the bounce-back loan scheme, which offers state-guaranteed, six-year terms of as much as 50,000 pounds with only minimal checks on the borrower’s ability to repay.

The discussions also focus on a standardized, automated approach to dealing with defaults, with measures to help borrowers rolled out across all lenders to ensure consistency and efficiency, according to the FT. The Treasury declined to comment to the newspaper.

To introduce an automated system, Financial Conduct Authority rules would have to be relaxed and executives are concerned about potential accusations that they approved loans to companies they knew were unlikely to repay, the FT said.

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