CBILS faulty: Sunak’s flagship UK lending scheme looks unfit for purpose
UK banks have faced a torrent of criticism for slow delivery of the coronavirus business interruption loan scheme, but the real problem is that the UK is providing loans that need to be repaid. Grants offered by governments such as Germany look better designed.
It’s a thankless task, having to evade questions on the government’s failures to supply adequate personal protective equipment to National Health Service staff, ramp up testing or even collect accurate data on the large numbers of deaths outside hospitals.
The youthful Sunak, still a newcomer to the cabinet, retains some credibility and performs well. On Monday, he talked about a funding bridge for UK businesses to see them through the present downturn and keep them alive to enjoy the hoped-for recovery. He sought to head off unfavourable comparisons with other state support packages.
“When you look at the totality of what we are doing, it is more significant in scope and scale than most other countries,” he said.
Sunak spoke on the same day that 140,000 UK companies first sought access to the government’s furlough payment scheme, before meeting payroll at the end of April. This promises to pay 80% of wages of staff that might otherwise have been laid off, up to a maximum of £2,500 per month.
But Sunak’s credibility is now in jeopardy over the most prominent buttress in his bridge, which he could not even bring himself to name in prepared remarks or questions and answers. Its signature lending scheme has helped just a fraction of one percent of UK small business.
One banker describes it to Euromoney in a single damning phrase: “It’s been a nightmare.”
It has also been profoundly misunderstood. Banks have been attacked for a perceived failure on their part to implement the scheme and produce outcomes it was never designed to deliver.
The coronavirus business interruption loan scheme (CBILS) was first announced in the Budget and opened for applications from small and medium-sized enterprises on March 23.
Administered by the government-owned British Business Bank (BBB), the scheme allows 40 accredited lenders to provide loans and overdraft facilities of up to £5 million, to be repaid over up to six years.
The UK government bears 80% of the credit risk while also paying interest and fees for the first 12 months.
No volume limit has been put on the scheme, which is meant to be demand-led.
One of the key issues with CBILS was it had to be launched at pace - Paul Gordon, Lloyds Bank
Those eligible for funding are viable UK-based businesses with turnover of up to £45 million that might have attracted bank finance on commercial terms were it not for the coronavirus.
Lenders must judge that such government-guaranteed finance will help these businesses trade through the short- to medium-term revenue loss of the lockdowns and then be repaid.
Comparisons with the much more rapid delivery of far larger sums through schemes in Switzerland and Germany are a little unfair.
For example, the Swiss scheme, which became effective on March 26, comprises Covid-19 loans for smaller companies of up to SFr500,000 ($514,000) at zero percent interest and 100% guaranteed by the state.
There are also Covid-19 plus loans of from SFr500,000 up to SFr20 million for larger companies, with an 85% state guarantee. Interest is set on the government-guaranteed portion of these larger loans at just 0.5%.
The fully guaranteed loans, which require Swiss companies to self-declare they are losing revenue due to the pandemic, flew out of the vaults. Within a week the Swiss banks had processed 76,000 loans, worth a combined SFr14.3 billion, and the programme had been doubled in size to SFr40 billion.
The UK scheme opened three days before the Swiss one. On Thursday, banking industry lobby group UK Finance reported that banks had provided loans worth £2.8 billion so far to 16,600 borrowers.
The pace is certainly picking up now, with approved loans doubling each week. But the UK has 5.8 million small businesses, according to the Federation of Small Businesses, so the government’s signature scheme has so far helped just under 0.3% of them.
It’s not just been slow. The UK scheme launched to stories of banks requiring the directors of small companies to grant security over their own homes to get loans.
Stronger SMEs able to raise loans from banks on purely commercial terms were told they had to pay the higher rates for these and that they were not even eligible for CBILS.
“One of the key issues with CBILS was it had to be launched at pace,” Paul Gordon, managing director for SMEs and mid corporates in the commercial banking division of Lloyds Bank, tells Euromoney. “At the start, we had to do a viability test on businesses applying to the scheme, then assess available security and whether they could afford new debt over the medium term.
“It meant that we couldn’t extend CBILS loans to low-risk companies, well managed within their cash flows, that had not been over-leveraged.”
The chancellor had to quickly readjust, saying that all viable companies, including those with adequate security to receive regular bank lending, would be eligible for CBILS. The government also removed the requirement for personal guarantees on loans of under £250,000, while preventing banks from requesting directors’ primary residences as collateral for loans above that.
“The government’s changes at the start of April were very welcome,” says Gordon.
But it had been a poisonous start.
And UK banks are still seeking security. They are required to. They are underwriting not only their own 20% risk exposure but also the taxpayers’ 80%, acting as credit assessors on the government’s behalf.
Stephen Jones, chief executive of UK Finance, had to spell this out in mid April to members of parliament on the Treasury Select Committee demanding an explanation as to why credit had not been made available more speedily and to more businesses.
“In designing a scheme which guarantees 80% but requires banks to undertake credit assessments of proposed borrowers on the way into the scheme,” Jones told them, “the UK government is expressing a very different risk appetite and a very different parcel of businesses it wants to support than in Germany and Switzerland, where a risk decision has been taken that every smaller business going into this crisis should get money under their schemes and get it fast.
“That is not the decision that has been taken in the UK,” he added.
And as for moving to 100% guarantees, which of course would ensure far faster take up – “that is a decision for the government to take,” Jones said.
In March, Germany had initially proposed that KfW would cover up to 90% of working capital and capex loans for SMEs, with banks retaining the residual risk. However, when it became apparent that the banks weren’t lending enough the country introduced “instant” loans in early April, for which the state (through KfW) assumes 100% of the risk.
The UK was painfully slow to make the same switch.
Sunak said on April 20: “I am not persuaded that moving to 100% guarantees is the right thing to do.”
But a week later he finally gave way, announcing so-called bounce-back loans of £2,000 to £50,000 that will be 100% government guaranteed for lenders. Small businesses can apply online from May 4 with a simple form and receive the money within days.
These are still loans of course, and will need to be repaid.
We are not going to be able to save every single job or every single business - Rishi Sunak, Chancellor of the Exchequer
There is an echo in the Treasury’s approach to lending under the CBILS scheme of the UK government’s response to the virus itself. After watching the disaster unfold in Italy, it was only after UK businesses started sending staff to work from home of their own accord (and even a body as venal as the UK Premier League cancelled football matches) that the UK finally went into lockdown on March 23.
Before that, the government had debated a strategy, clearly attractive to some senior members, that the UK should, in prime minister Boris Johnson’s memorable words: “Take it on the chin, take it all in one go and allow the disease, as it were, to move through the population, without taking as many draconian measures.”
At the time of writing, the disease had moved through 133,495 of the UK population, including Johnson himself, leaving 18,100 dead (if you just take figures from the Department of Health and Social Care that are obviously incomplete).
With less than 1% of the world’s population, the UK has suffered 10% of world coronavirus deaths.
The lockdown is now moving through the population of UK businesses, and who knows what the fatality rate will be.
Sunak’s own phrase, much less memorable but callous in its own way, is: “We are not going to be able to save every single job or every single business.”
How does this all look from inside the banks?
“Some customers still misunderstand and think these are grants,” a senior source at one large UK bank tells Euromoney. “We have to explain that they are loans that need to be paid back.
“It is in our agreement with the British Business Bank that we must follow our normal lending processes, and it’s also in our letter from the FCA [Financial Conduct Authority] that we should not divert from those. And I think that’s the right approach. This is the taxpayers’ money. I am at an age where it is my children that will be paying this back. It is also simply not moral to put debt into a business that cannot or is very unlikely ever to be able to pay that back.”
But how do you even begin make such a judgement today?
Banks’ credit models look backwards. If a company was viable on December 31, 2019 or January 31, 2020, before the pandemic was established, does that mean it will still be viable in six or nine months? How do you apply normal lending processes in such utterly abnormal times?
Borrowers have to supply cash-flow forecasts in their CBILS applications for when the economy opens up again, without knowing when that will be, whether the virus will be contained, whether there is likely to be a second peak and further lockdowns, how their supply chains will have been disrupted or their customers’ appetites changed.
Euromoney thinks back to a conversation in March with Jean Pierre Mustier, chief executive of UniCredit, then seeing a humanitarian crisis unfold in Italy that the UK government could still not accept was about to hit it too.
“When you have a big shock, usually people think in terms of continuity, in a linear evolution,” Mustier told Euromoney. “But in fact, when you have a big shock, you need to think in terms of discontinuity.”
There’s no question that the banks have really got to really dig in and get on with processing this stuff. This is livelihoods at stake - Andrew Bailey, Bank of England
How’s this for discontinuity?
The UK Office of Budget Responsibility has set out the case for a 35% decline in UK GDP during the second quarter of 2020, with unemployment hitting 10%. It sees that leading to a 12.8% fall in GDP for the whole of 2020 before a hoped-for 17.1% rebound in 2021.
It’s almost impossible to grasp what is now playing out in real time. If the toughest bank regulator in the world had suggested this as a stress test just five months ago, they would have been laughed out of their jobs.
The CBILS scheme applies business-as-usual rules at an extraordinary moment in economic history. Normal lending processes seem utterly inappropriate. Yet banks now face two opposing pressures: to get large volumes of new loans to unrated borrowers out of the door as fast as possible when simple common sense suggests that the likelihood of default is soaring; and to strictly follow conventional rules over prudent lending and consumer protection for borrowers.
Gordon at Lloyds says: “The senior managers regime is very clear and has been re-enforced by regulators and this requires an affordability assessment so that business owners are not saddled with debt that might get them into difficulty.
“We are trying to be supportive, but we have had to decline some CBILS applications for affordability reasons, although we are still supporting more than eight out of 10 applications.”
A source at another UK bank picks up the point: “These loans remain highly regulated so we can’t mis-sell them. We need to follow 17 different steps and be completely thorough. There is no way around that.”
Why is it so important to go through all these steps?
“Because the government guarantee has to be watertight,” says the source. “If it isn’t, banks will have to hold many of these loans as fully impaired on their balance sheets, meaning that we would have to hold large amounts of capital against them under IFRS 9 accounting. That would reduce our balance-sheet firepower to lend to others very quickly.”
Pass the blame
A rather large game of pass the blame is now underway. The UK government, the banks and financial regulators are all trying to be terribly polite in public and present a united front. But tensions are high and there is a lot at stake.
In mid April, Andrew Bailey, governor of the Bank of England, got on the phone to journalists.
On the banks’ performance on CBILS, he had this to say: “I don’t think they are dragging their feet in the sense of they don’t want to do it. I think there is a serious strain on operational capacity, which has to be solved, let’s be clear, has to be solved. But it is a strain because (a) the volume of applications is way above what you would be seeing in normal circumstances; and (b) none of us are operating in normal circumstances.”
Challenged that this sounded rather sanguine, Bailey disagreed.
“There’s no question that the banks have really got to really dig in and get on with processing this stuff,” he said. “This is livelihoods at stake.”
If Euromoney had a pound for every banker telling us they are part of the solution this time not part of the problem, we would have enough flour and pasta to last a lifetime. But that perception is now slipping away.
To suggest that CBILS has not been executed smoothly is an understatement.
“It has been a nightmare,” one banker tells Euromoney. “In part because it was based on the British Business Bank’s enterprise finance guarantee (EFG) scheme, in which only RBS was really a leading participant, which is why they did 70% of the loans at the start.”
On April 8, Howard Davies, chairman of RBS, while announcing that he and chief executive Alison Rose would take 25% cuts to their fixed pay for 2020, said: “We are implementing the government’s loan schemes as fast as we can.”
Other banks have had to struggle through this.
A Barclays spokesperson tells Euromoney: “We are processing very significant volumes of CBILS loans, and we are confident that we are doing everything we can to get money to businesses as quickly as possible under the scheme.”
Gordon at Lloyds says: “We did maybe £20 million in lending in 2019 through EFG compared to £18 billion in total for UK PLC last year. It wasn’t part of most banks’ main lending platforms, which is why we have all had to throw so many bodies at it. But there has been an awful lot of hard work done on this and terrific collaboration.”
A source at a different bank says that by mid April, it had processed 3,500 applications: “On the first day, we could not do one.”
Some specialist lenders that might have usefully contributed from the start, could not.
Nick Lee, head of regulatory affairs at OakNorth Bank, a digital UK lender funded by retail deposits that extends loans of between £500,000 and £25 million to the SME segment, says: “Because the scheme was derived from the EFG, of which we were not a member, we could not participate from day one even though we would have liked to.
“We strained every sinew to be accredited as soon as possible and staff at the British Business Bank worked extremely hard, going through our processes, so that we were accredited on April 11.”
The Co-operative bank, Starling, Close Brothers, Coutts and some others also joined the same day. But at the very moment when time is of the essence, this is still a slow process.
Ten days later on Tuesday April 21, Lee tells Euromoney: “The BBB has to dot a few ‘i’s and cross a few ‘t’s, and we hope we will be able to extend our first loans in the next few days. We are ready to go for our existing clients. But these are loans not grants. And it’s a complex process, albeit one to which we believe our underwriting technology is well suited. We are entirely retail funded. We want to support our borrower clients, but we will always protect our depositors.”
“With hindsight, basing CBILS on the EFG rails was not the best choice,” says another banker. “EFG was quite a specific use case for companies that couldn’t otherwise secure bank funding. It was more expensive therefore and seen as a last resort. These were not the right rails for a brand-new proposition, and thankfully we have now moved past that.”
UK banks didn’t have enough specialist SME lending staff to cope with CBILS. Many companies have complained of banks not responding to queries, suggesting that call centres in India were supposed to respond, just when that country is going through its own strict lockdown.
Euromoney talks to UK banks that have since thrown 700 to 800 bodies each at the task of processing applications under the scheme, asking staff who may have previously worked in small business lending, or areas close to it, to come back and help divisions that had been manned by maybe a third of those numbers.
There’s a reason why new banks such as OakNorth and fintechs like iwoca have stepped into the SME lending segment: this is a hard business for banks to get right.
“Clearing banks that might put a five- or six-person underwriting team on a £200 million to £300 million term loan for a large corporate just can’t make those scale economics work for £2 million or £5 million loans, much less microloans of under £30,000,” says Lee.
“We are entirely cloud-based and can harness big data very efficiently for our credit committees, so for example analyzing hotels by proximity to transport hubs, by local footfall, competitors’ room rates and customer ratings.
“And we do that not just when a loan is made but through continuous monitoring afterwards, so we can work with a borrower and head off any impairment.
“We were able within 24 hours of the shutdown here to look all across our loan book in the UK,” Lee adds, “as well as $30 billion of loan books of banks around the world that use the OakNorth Platform and utilize our Covid Vulnerability Rating (CVR), across 100 models and 1,600 sub sectors for borrowers.
“The CVR assesses which companies might be worse affected by a six-week, three-month or six-month lockdown. That leads to better understanding for us as a bank in the UK and for our clients overseas of the impact of the current pandemic and enables us to make better lending decisions, including the utilization of CBILS in the UK.”
SMEs are an underprovided segment in the UK and in other developed markets around the world - Nick Lee, OakNorth Bank
How is that working in practice?
“Some companies need equity not debt,” Lee says. “Some can basically mothball their businesses, reduce costs and reduce funding. Some may be asking for £1 million of lending when we think they might need £2 million, and we are arranging that flexibility.
“We are also doing non-CBILS lending,” Lee continues. “We had plans before this to grow our balance sheet – and still do. SMEs are an underprovided segment in the UK and in other developed markets around the world.”
It sounds good. But OakNorth Bank is small. It has leant £4 billion to UK businesses and has just a £50 million allocation from the British Business Bank.
If 16,600 loans have been approved from 36,000 formal applications by Wednesday April 22, how many UK SMEs have enquired? One banker suggests maybe 400,000 of those small companies. But this is not well documented.
In mid April, Mike Cherry, chairman of the Federation of Small Businesses (FSB), said: “Many members tell us it’s difficult to get to the formal application stage – banks are still slow to respond to CBILS enquiries. Even if you do get your forms through, the process is very demanding for the uninitiated. We need simplification: banks should look at pre-filling forms based on data they already have on customers and we shouldn’t have behind the scenes reporting requirements holding up approvals.”
The banks’ reputations have barely recovered from the scandals of the RBS Global Restructuring Group and HBOS Reading frauds, when banks tipped SMEs into insolvency to seize their assets.
The last thing they need now is to be blamed for execution failures on a scheme not of their design and never intended to ladle out state aid.
They are trying to act sensibly.
One banker tells Euromoney: “What we are saying is that if you had a coffee shop on a town centre high street that was usually full up to the end of January and was profitable, then we will support you until this is over in the expectation you will be profitable again.”
Jones at UK Finance rejects rumours that banks are gouging customers on CBILS pricing, suggesting rates should be mid-single digits to reflect the 80% state guarantee.
There is no public pricing grid. Only HSBC has disclosed its rates: 3.49% on loans under three years and 3.99% on loans over three years. The bank is sending a clear message here. Given likely defaults and costs of administration, HSBC is not going to be paying any profit bonuses from CBILS.
There has been a rush to judgement over CBILS that the UK has suffered a train wreck while Switzerland and Germany have enjoyed glittering successes. But fraudsters are smart.
They can scrape together data that allows them to appear like legitimate companies, apply for state loans, get the money into accounts and disappear. So, it remains to be seen what volume of 100% state-guaranteed loans go to the right hands.
There’s a consensus that speed is of the essence and that large portions of the vital SME sector in the UK are about to sink without trace. Really?
“The vast majority of SMEs don’t want to take out bank loans in good times, and they’re very fearful about taking them out in tough times,” one banker tells Euromoney. “It attracts no attention, but we have given loan principal repayment holidays for the rest of this year to twice as many SMEs as the several thousand that we have now extended CBILS loans to. Many clients think that with those holidays, existing funding and the furlough scheme they can get through the summer.”
“If you think of those 5.8 million small companies in this country,” he says, “more than two thirds will be sole traders. Of the rest, around 80% are not minded to borrow. They run their companies out of cash flow.
“We bank around one in five UK businesses. We see businesses tapping into an array of government support – the furlough scheme, tax deferrals, rates reductions, cash grants for smaller businesses. We also launched our six-month repayment holidays in early March, and for our larger SMEs [turnover above £3 million] we have received 10 times as many applications for those as we have CBILS loans. That’s an immediate cash flow benefit.
“Some businesses are coming to us and saying: ‘We don’t need help now, but if this goes on beyond 12 weeks, we may do.’ So we could see a second wave of requests. And for our larger SMEs, we have maybe 10% to 15% of customers that do need extra cash right now.”
It’s a very rough estimate of course, but that would suggest 387,000 potential applicants to CBILS, with the scheme having reached over 4% of those businesses minded to take on debt in the course of normal business.
That’s a lot better than 0.3%, although it’s not clear how many of those in most pressing need are among the 16,600 that have so far been approved.
Will a slow, painstaking process inevitably produce a bad outcome for the UK, with a higher corporate failure rate and a worse economic impact that 100% state guarantees might have avoided? Maybe that’s exactly what the history books will one day show.
But bankers suggest that having applied in a panic for CBILS loans, some companies are now seeing other ways to get through, with furloughs to pay staff, forbearance from the tax authorities, relief on rates and rent for business premises, extended overdrafts and trade-finance facilities, as well as the suspension of certain bank charges.
“We always talk to each borrower after a loan has been approved to explain once more that it has to be repaid and allow them to rethink,” says one banker. “It makes the whole thing even slower, but some decide they can survive without more debt after all.”
Let’s hope they’re right.