UK banks near pact on plan to recover soured Covid loans

Bloomberg

British banks are finalising plans for outsourcing the recovery of billions of pounds in taxpayer-backed business loans issued during the Covid-19 pandemic.
A consortium of lenders is expected to set up an entity that will oversee debt collectors tasked with chasing bad loans, people with knowledge of the matter said. A final decision is expected in early December, said the people, who asked not to be named discussing private information.
The largest government-backed loan initiative, known as the Bounce Back program, stands behind more than 40 billion pounds ($53 billion) of debt and is the main focus of the repayment discussions. The National Audit Office (NAO) said in October that one government scenario estimated as much as 80% of these loans, intended to keep small businesses afloat, could ultimately default.
The terms for the agencies are still under discussion. One option to manage the expected surge in non-performing loans is to ask multiple agencies to compete for tranches of debt, according to people with knowledge of the negotiations.
Banks and UK authorities have spent months grappling with the question of how to collect debts from businesses in the aftermath of the pandemic. While the loans are set to stay on banks’ balance sheets, the taxpayer will bear most of the cost of any defaults through state loan guarantees.
It’s not unusual for UK banks to outsource bad debts to collection agencies, but the creation of a new panel to tackle the mountain of coronavirus loans highlights the challenge lenders face in an economy where the number of firms in significant financial distress is surging and one in ten companies fear going bust, according to a British Chambers of Commerce survey. The recovery process could be complicated by cases of fraud as well as
exploitation by organised crime, which the National Crime Agency is investigating.
“There is no question we will need more than one debt collection agency,” said Stephen Pegge, managing director at UK Finance, which is coordinating the talks on debt collection. “We are trying to keep it very simple.”
Lenders want to avoid damaging their reputations by chasing companies in financial distress. The plan for a panel, initially advanced by the high street lenders including Lloyds Banking Group Plc and NatWest Group Plc, won the support of smaller lenders that have less capacity to pursue debts. Outsourcing the job, with collection agencies taking a commission on recovered loans, could also prove cheaper.
The banks themselves will still be responsible for the loans and will be accountable for the conduct of any external debt collectors they use, the people said. Banks must also show they have taken reasonable steps to recover the debt before they can claim state guarantees.
Last spring, banks and government briefly explored the idea of creating of a bad bank, where lenders could offload debts likely to go sour, as some did following the 2008 financial crisis.