Bounce Back Loans: Prepare to be hit by the Bounce Back

The National Audit Office (NAO) has recently released a report on the Government’s Bounce Bank Loans (BBLs, the Scheme) estimating that 35% to 60% of borrowers may default on the loans due to minimal credit checks and fraudulent applications.

BBLs, launched on 4^th May 2020, have proven a popular lending scheme with small businesses who required immediate support to survive the COVID-19 Pandemic. The loans of between £2k and £50k were seen as critical for small businesses given the impact of lockdown, and in supporting them would help to reduce the wider economic stress caused by the government’s responses to the Pandemic.

Unlike typical loans, this government-backed borrowing required only limited credit and customer checks. This has increased the likelihood that businesses, some of which were struggling before COVID-19, will not be able to repay loans, leading to high defaults and ultimately losses for the taxpayer.

HM Treasury data shows that as of 6^th September 2020, the Scheme delivered more than 1.2 million loans to businesses, at a total value of £36.9 billion – 90% of these going to very small (micro) businesses located across the UK. The five largest UK lenders (Barclays, HSBC, Lloyds / Bank of Scotland, NatWest / RBS and Santander) provided the largest share of loans under the Scheme, increasing their foothold in the SME lending market.

The NAO’s report concludes that the Scheme achieved its initial objective of quickly supporting small businesses, but a lack of more detailed Scheme-specific objectives will make it difficult to measure its ultimate success. However, given the high estimated default rate, there is much work to be done in the upcoming months to ensure the risks to value for money are minimised, including implementing a robust debt collection plan with lenders and fraud investigation arrangements.

In light of the report from the NAO, there are two responses we recommend banks to consider:

1. Prepare the recoveries and restructuring function

Loans are likely to be written off more quickly than for other COVID-19 related business loan support schemes, but HM Treasury has not yet finalised how lenders should collect overdue loan repayments. Lenders are required to pursue “appropriate recovery processes” in line with their existing standards under the terms of the guarantee agreement.

In our experience, SME and corporate lending recovery functions are not established to deal with this volume of expected defaults, especially when paired with growing volumes of cases from the existing loan books. Lenders must act now to create plans to manage these risks, and prepare their responses to the likely wave of BBL defaults.

As borrowers do not need to make any payments for 12 months, there is a window of opportunity until May 2021 to review their recoveries and collections processes and adapt or automate them where possible. This is an opportunity to adapt often neglected processes to ensure the effective return of value, reduction of operational and reputational risk and safeguard fair outcomes for clients in distress.

2. Review of the E2E credit lifecycle

Automation of key operational processes and especially handoffs between stages in the end-to-end credit process will lead to significant benefits both in those specific steps and downstream. We at BCS Consulting have supported large UK Banks in transforming the digital lending process and incorporating automation to reap benefits from additional revenue generation and cost saving through enhanced customer relationship management.

Creating more automated solutions for assessing up-front and for monitoring credit and fraud risk will also enable the development of management information and create greater control. Although the BBLs are guaranteed by the government, it is each lender’s responsibility to manage each loan – a challenging process overhead given the volume of additional loans via the BBL scheme.

In our experience, this can be a tough journey, but the crisis has shown that close co-operation between functions in the credit lifecycle is essential and that it can be greatly aided by sensible use of automation.

At BCS Consulting, we use our deep knowledge of the financial service sector to help clients define and deliver large-scale business and technology change initiatives. Our Risk Practice has extensive experience working with major banks to implement process transformation and automation across the Lending Journey – bringing together the best elements of our credit risk and technology expertise. Customer experience needs to be at the heart of design considerations, and by marrying credit risk expertise with a customer-centric approach to digital transformation, we help clients to build solutions that deliver for both the bank and its customers.