According to the industry watchdog, British banks turned down more than 150,000 applications for government-guaranteed business loans during the Covid-19 outbreak in an effort to prevent fraud.
According to Chief Executive Officer Nikhil Rathi, the Financial Conduct Authority told lenders not to relax their controls on potential borrowers when offering credit under the Coronavirus Business Interruption Loan and Bounce Back Loan programs.
"Our understanding is that approximately 14% of CBILS loans were denied on the first request because of diligence concerns and 8% of BBLS loans," Rathi said in a virtual session with the U.K. Wednesday's parliament committee.
Since their introduction in May, the programs, intended to fund smaller companies, have received more than 1.6 million applications. Bounce Back loans have proven to be the most popular, with businesses receiving around 40 billion pounds ($52 billion) so far, but some critics have pointed to loose eligibility criteria that have left lenders open to potential fraud.
After the country went into lockdown, the initiative was launched "at great speed" to meet the need for corporate funding, said Rathi, who took over as head of the FCA in October. The regulator made it clear that he said, "banks must maintain appropriate systems," particularly when taking on new customers.
Last week, bosses at Lloyds Banking Group Plc and NatWest Group Plc said they were cautious about accepting new borrowers.
Talks about Repayment
The Treasury, banks, and FCA are discussing how the state will repay these loans, or else backstop them, Rathi said. "Instinctively, we want to prevent tiny companies from getting in the way of early debt recovery," he said, adding that a decision would be taken in the coming months.
The Guardian has reported that one option is to set industry standards for the recovery of loans. A centralized debt collection agency has been proposed by lobbyists — an idea to which, according to Rathi, the FCA "will in principle have no objections."
Banks are well aware that after the last financial crisis, they do not want to repeat what happened. Hopefully, we can make sure that doesn't happen together,' Rathi said.