The government has handed £66m in interest to banks for taxpayer-backed coronavirus loans

The government paid Britain’s biggest lenders close to £65.7m in interest in just three months. This was for loans to British businesses during the pandemic.

Interest rates

The government handed over £65,658,583 for interest on loans between the start of April and the end of June. This is according to figures obtained by the PA news agency through a freedom of information request. The interest was paid on loans taken under the Coronavirus Business Interruption Loan Scheme (CBILS) and for the Bounce Back Loan Scheme.

Through the schemes, banks lent billions of pounds to small businesses. The government promised to pay the interest for the first 12 months, as ministers tried to protect the economy, which is now in a recession.

The bounce back loans have a set 2.5% interest rate to avoid excessive charges. However, banks can set their own rates for CBILS and CLBILS. A separate freedom of information response from the British Business Bank shows that the average interest changed on CBILS loans is 5.1%.

Labour shadow business secretary Ed Miliband told PA:

It’s right that government has stepped in to support businesses by underwriting loans, but there are real questions about why government has not got a better deal from the banks for its support.

The Bank of England’s base interest rate is currently 0.1%, a record low.

Reports also suggest that several banks, Barclays among them, have stockpiled cash to start paying out bonuses to senior staff next year.

Commercial interests

The BBB declined to reveal how much interest individual banks were charging on the CBILS loans, saying it could harm the banks’ commercial interest.

In order to avoid breaking European state aid rules, banks have been required to pass on to borrowers the benefits of having the loans 80% backed by the government.

A spokesperson for banking trade body UK Finance said:

Under the terms of the Covid-19 lending schemes set by the government, Business Interruption Payments are made on behalf of borrowers to offset any interest that would usually be charged to a business customer for a commercial loan.

They are therefore effectively a payment to the business not a subsidy for the lender.

Lenders also agree not to charge any fees for setting up the loan or for early repayment, but will of course bear administrative and funding costs. For convenience these payments are made in arrears to the lender to account for interest that would have been charged.

The interest rate on Bounce Back Loans was set by the government at 2.5%, lower than market rates.

Billions

More than £17bn has been lent in CBILS loans, with more than £11bn handed out before the end of June. Meanwhile, the banks have provided £40bn in bounce back loans to date.

Earlier this month, the National Audit Office revealed that the government expects to pay more than £1bn to the banks to cover the costs of the Bounce Back Loan Scheme. Bank insiders say that it’s not free for them to provide the loans. And many banks have decided not to provide bounce back loans because they don’t think they can break even.

The banks stepped in to provide cash to well over one million companies during the depths of the pandemic. And loan applications are still open until the end of the month. However in recent months, several banks have stopped taking applications for new customer accounts. This has left some businesses struggling to access the bounce back loans.

Bounce back

Miliband added:

Access to bounce back loans has all but dried up for those who are not existing customers of high street banks at a time when so many firms are on the brink.

The biggest priority is for government to act to sort out the continuing problems in the loans schemes and to ensure that finance keeps flowing to businesses.

Otherwise, more businesses will go bust, jobs losses will continue to mount, and our economy and the taxpayer will pay the price in the long run.