The taxpayer could be saddled with a £40billion bill as thousands of loans handed out under emergency government schemes turn sour.
The Treasury watchdog confirmed that losses under the Bounce Back loan scheme, the Coronavirus Business Interruption Loan Scheme (CBILS) and the larger CLBILS will be greater than feared.
In the worst-case scenario, the Office for Budget Responsibility (OBR) thinks the taxpayer could end up covering £40billion that companies fail to repay.
Loans burden: Treasury watchdog the Office for Budget Responsibility has confirmed that losses under emergency business loan schemes will be far greater than first feared
This is much worse than the £33.7billion of losses the watchdog predicted as possible in July.
Even under the OBR’s more moderate base-case scenario, losses will hit £29.5billion – £12.6billion more than was predicted.
It comes as banking industry bosses warn that billions of pounds of Government money is being lost to fraudsters.
Virgin Money chief executive David Duffy said yesterday that his bank had decided to only hand out Bounce Back loans to existing customers in order to reduce fraud.
He added: ‘There is an environment out there where we know there’s been a lot of fraud, and what we’ve been very happy to do is lend to those customers who we have a relationship with and know.’
The Bounce Back loans, aimed at businesses with turnover of up to £200,000, involve banks carrying out few checks but come with a 100 per cent government guarantee.
The scheme has so far lent £42.2billion to 1.4m small companies.
The Treasury was warned multiple times about the risk of fraud, but pushed ahead because it worried businesses were going to the wall during lockdown and desperately needed the cash.
Part of the reason that losses under the three emergency loan schemes are now expected to be higher is because the British Business Bank (BBB), which is administering the schemes, expects more businesses to go bust.
The government-backed BBB estimates that a staggering 5 per cent to 20 per cent of the large businesses who have borrowed under CLBILS could default on their debt.
Less surprisingly, it thinks 10 per cent to 25 per cent of smaller CBILS borrowers and 35 per cent to 60 per cent of Bounce Back borrowers will become unable to pay back their debt.
The Government has agreed to cover 80 per cent of any losses which lenders suffer under the CBILS and CLBILS schemes and 100 per cent of losses under the Bounce Back scheme.
The other reason why losses are higher is because the schemes have been extended.
When Prime Minister Boris Johnson imposed a second lockdown for England at the start of this month, Chancellor Rishi Sunak pushed back the deadline for applications under the three loan programmes from the end of November to the end of January, to help businesses stay afloat.
The OBR now thinks total borrowing under the three schemes could hit £87billion by the time they close, up from the £65.5bn which had been lent on November 15.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.