UK COVID lending risks creating zombie firms, think tank warns

LONDON (Reuters) - Britain’s government has risked creating a legion of ‘zombie’ companies by encouraging banks to lend 45 billion pounds ($62 billion) to small businesses with a 100% state guarantee during the COVID pandemic, a leading think tank warned on Wednesday.

FILE PHOTO: Britain's Chancellor of the Exchequer Rishi Sunak is seen at Downing Street amid the coronavirus disease (COVID-19) outbreak in London, Britain September 24, 2020. REUTERS/John Sibley/File Photo

The Resolution Foundation said most of the support given by the government to businesses and workers was useful and more would be needed when finance minister Rishi Sunak sets out his 2020/21 budget on March 3.

But it said the structure of the Bounce Back Loan Scheme - which allows small businesses to borrow money equivalent to three months’ sales, up to 50,000 pounds - gave banks an incentive to keep alive firms with weak long-term prospects.

“This could slow down the efficient resolution of these firms, and could be of a sufficient scale to have macroeconomic implications,” the think tank said.

“Allowing firms which are not viable in the long term to continue operating can impede the reallocation of capital and labour from less productive firms to more productive firms.”

The Bank of England has warned the pandemic will leave many firms heavily indebted and in need of restructuring and more investment from shareholders.

Finance minister Rishi Sunak originally opposed a 100% state guarantee for low-interest lending to small businesses, but changed his approach in April after firms struggled with the credit checks needed to get emergency finance from banks.

Last week he said businesses would be able to spread loan repayments over 10 years, rather than six, and to delay starting repayments by a further six months.

The Resolution Foundation, which normally focuses on issues affecting low-paid workers, said Sunak should require banks to take on 20% of the loan risk in exchange for a payment from the government, as a way to discourage lenders from propping up firms that would never repay their loans.

Britain’s Office for Budget Responsibility estimated in November that defaults on the programme would cost the government 27 billion pounds.

($1 = 0.7253 pounds)

Reporting by David Milliken; Editing by William Schomberg