Banks consider new debt collection agency to chase Covid loan repayments

Banks are weighing up the formation of a joint debt collection agency to prevent reputational damage to their individual brands as they try to recover emergency loans handed out during the pandemic.

Small businesses have borrowed more than £35bn from banks under the Bounceback Loan Scheme, which sees the Government guarantee 100pc of any losses banks suffer if borrowers fail to repay.

Bank lobby group UK Finance has commissioned a feasibility study for a "shared recoveries utility" so that banks will not be seen to directly exert pressure on small businesses that fall behind on repayments of their bounceback loans, Sky News reported.

Finance bosses fear they will be cast as villains of another economic crisis if they are forced to aggressively demand repayment from struggling businesses for Government-backed loans.

Stephen Jones, the former chief executive of UK Finance, said in May: "The banking industry is the collection agency and, unfortunately, I fear we will end up being the bad guys again when it turns out that money can’t be repaid."

Banks are also concerned that some businesses took out the emergency loans based on the incorrect assumption that they were effectively grants and would never have to be repaid.

Consultants at EY have been called in to investigate the possibility of launching a debt recovery agency.

More than 1.1 million businesses have been approved for bounceback loans since the scheme launched in May, according to the latest figures.

The scheme allows small businesses to borrow up to £50,000 from approved lenders without paying any interest or fees for the first 12 months.

A new debt collection body would require the approval of the Treasury, the Financial Conduct Authority and the British Business Bank, which administers the bounceback scheme.

UK Finance and EY declined to comment.