United Kingdom

Banks to charge 35% on emergency loans: Crippling rates loom

Banks will charge businesses up to 35 per cent interest on Rishi Sunak's emergency Covid loans within weeks, The Mail on Sunday can reveal. 

Data seen by this newspaper shows lenders have used the Chancellor's flagship £19billion loan fund to saddle businesses with 'usurious' rates, which come into effect this spring. 

Banks have issued £35 million of loans at rates of more than 14.99 per cent – even 34.9 per cent in one case – to firms shuttered by the pandemic, Treasury documents show. 

Crippling repayments: Banks will charge businesses up to 35 per cent interest on Rishi Sunak's emergency Covid loans within weeks

Businesses will face crippling repayments from March as the loans hit their one-year anniversary dates and the 12-month interest-free period comes to an end. 

Experts last night predicted that the economy will be devastated this spring as taxpayer support is withdrawn – and warned the pain would be worse than the crash in 2008. 

They said the only hope of avoiding major collapses was Sunak propping up companies for longer. 

As well as coronavirus loan repayments starting from March for hundreds of thousands of businesses, the furlough scheme paying 80 per cent of wages will be withdrawn at the end of April. 

Richard Fleming – European head of restructuring at Alvarez & Marsal, which broke up and sold off the ruins of Lehman Brothers after the 2008 financial crisis – warned that a number of giant companies would go bust. 

'We'll see some collapses of big names, most certainly, you'll see it in restaurants, retail, travel and tourism,' Fleming told The Mail on Sunday. 

'The big change from the financial crisis is that we are dealing with companies that were good businesses, but Covid has really smacked them. The damage is probably bigger [than the financial crisis]. It's just when it really flows through is still coming – it's terrifying and there will be a reckoning from May and June. 

'The second half of 2021 is when the health crisis will turn into a financial crisis as the vaccine kicks in and Government support ebbs away.' Fleming said private equity firms with 'trillions to invest' would swoop on weak, indebted firms. 

'I think you're going to see a lot of business migrate to private equity ownership,' he added. The prospect of banks levying exorbitant interest rates on struggling firms that used Sunak's flagship Coronavirus Business Interruption Loans Scheme (CBILS) will exacerbate fears of a wave of insolvencies. 

Sunak launched the scheme on March 23 last year for businesses hit by the lockdown, pledging to pay the interest for the first 12 months. Taxpayers are on the hook for 80 per cent of the loans that aren't repaid. 

Banks had promised that they would pass on the benefit of the Government guarantee, which in theory should enable them to lend at lower costs. 

But an interest rate cap of 14.99 per cent had to be introduced in June over fears banks might hit businesses with sky-high rates.

Lenders that joined the scheme before the cap were still allowed to hand out loans at any rate they chose. The highest rate that has been charged is 34.9 per cent. 

Overall, loans worth a total £19.6billion have been issued under the scheme, at an average rate of 5.6 per cent. 

Lord Myners, the ex-City Minister who masterminded the bank bailouts in 2008, said: 'It's extraordinary that some of the loans have been made out at such rates. 

'Are you really helping businesses by lending them money at 14.99 per cent? It beggars belief, these are usurious rates. And these loans will definitely need to be rolled forward if the repayments start soon.' 

Labour's Siobhain McDonagh, who sits on the Treasury select committee of MPs, has written to the Chancellor to protest. She said: 'These are the kind of rates you would expect on a credit card. Now is the time to pull together to support British businesses, not load them up with debt that is entirely unreasonable.' 

A spokesman for the British Business Bank, the Government-backed institution behind the loan scheme, said: 'It is a requirement of the CBILS agreement that the economic benefit of the guarantee is passed on. 

'As a result, it was unlikely lenders would've been able to justify many facilities above 14.99 per cent, but the cap has now largely eliminated that possibility.' 

Banking trade body UK Finance said the 'vast majority' of loans have been issued at a rate of less than 14.99 per cent. A spokesman said: 'Lenders have agreed not to charge any fees for setting up the loan or for early repayment, but will of course bear administrative and funding costs.' 

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