The Bank of England has urged banks to maintain business credit once government-backed Covid-19 loan programs end this month, fearing a sharp drop in lending that could choke the economy.
In a report by the BoE’s financial policy committee released on Friday, the central bank said it was in the industry’s “collective interest” to provide loans after government-backed programs were cut to the end of March. Limiting loans would be self-destructive, he warned.
British companies have borrowed over £ 75 billion through four programs, which the Treasury launched in the first lockout a year ago to keep businesses from running out of cash. However, they are expected to be liquidated this month.
The FPC – whose members include BoE Governor Andrew Bailey and Sam Woods, chief executive of the Prudential Regulation Authority – said banks have supported UK households and businesses throughout the pandemic.
But he added: “As government projects come to an end, the FPC felt that the onus would fall on the financial system to play a greater role in supporting the recovery.”
Around 1.6 million businesses have used the government-guaranteed pandemic loans, more than a quarter of all small and medium-sized businesses in the UK.
In the last month alone, more than £ 2 billion has been borrowed under the four loan schemes.
From April 6, the government will operate a new recovery loan program this will secure 80 percent of a bank loan of up to £ 10million.
But business leaders have warned that businesses may be deterred from using the new system because of the use of personal guarantees and the likelihood of much higher interest rates than previous rebound bank loans.
The BoE said it expects banks to make full use of their balance sheets to continue supporting businesses throughout the recovery.
“As government-backed loan guarantee schemes are scaled back, it is in the collective interest of banks to continue supporting viable and productive businesses,” the BoE said.
Reducing lending to preserve balance sheet strength “would have a negative effect on the economy and could therefore have an even more negative effect on banks’ capital ratios,” he added.
The report states that the banking system has sufficient capacity “even though the economic performance is considerably worse than what is currently expected”. UK lenders’ overall Tier 1 capital ratio stood at 16.2% at the end of December, well above the minimum requirements.
David Postings, managing director of UK Finance, the banking lobby group, said banks have provided unprecedented support to businesses throughout the pandemic and will continue to do so.
“Banks and lenders have the capital and liquidity to support the demand for financing, and many companies have excess deposits over loans,” Postings added.
“The banking and financial sector is determined to play its full role in helping to restore the UK economy to sustainable growth.”