Bounce back challenge awaits collections
Recovery of the first defaulted Covid business loan accounts starts in May, with volumes and fraud levels an unknown quantity, says Intrum UK MD Eddie Nott. The collections industry needs to prepare for an influx of demand from lenders seeking the repayment of Covid small business loans.
Last month, the plan to form a central utility to co-ordinate the repayment of Covid bounce back loans was abandoned, meaning lenders will be setting their own approach and working directly with third parties.
Since the Bounce Back Loan Scheme (BBLS) was created in May last year, 29 lenders have handed £45.6bn to over 1.5 million business in a bid to keep them afloat through the Covid-19 crisis. Now it’s going to be up to the collections industry to recover as much of that as possible.
While banks initially hoped to work together on the collection of these government-backed loans, talks have not yielded the expected joint venture – though it is still hoped there will be common principles to ensure consistency. Instead, lenders will handle recovery on an individual basis. With the first payments due in May and the British Business Bank predicting default rates anywhere between 15% and 80%, how easy this will be is an unknown factor.
The BBL scheme was enacted quickly, without the creditworthiness criteria that would be applied during normal times, and lending has exceeded initial estimates. As they delve into specifics, collections teams may discover high levels of fraud as well as facing steep defaults.
There is undoubtedly an issue of capacity – we need to ensure our teams are ready for what could be a flood of complex accounts.
Lending under the scheme continues until the end of March, and business have been able to extend their initial loans to the maximum £50,000 (or 25% of their turnover) if required. Government has also announced plans to allows businesses to extend their loan terms from six to ten years, with the option of payment breaks and interest-only payment periods to help them ‘Pay as you grow’.
The flexibility of bespoke collections technology will be an important factor in handling these loans and ensuring that proper steps are taken to engage with borrowers. This may be tricky for banks operating legacy systems if they have been unable to make significant investment in these areas. To be able to claim their guarantees, lenders need to demonstrate that they have attempted recovery over a twelve-month period. There is likely to be significant national attention on progress, with all eyes on the results.
The Credit Services Association has already called for engagement to be at the heart of the process – even after guarantees are activated – so that the maximum amount can be recovered for the public purse. In the long run, the CSA believes this could make a £6bn difference. This type of engagement strategy is an area we are well-equipped to deliver as an industry.
Issues of perception around whether businesses need to repay their loans or not should be tackled at a national level. However, collections specialists will need to establish the individual circumstances of each business and gauge ability to repay, plus put in place necessary forbearance measures.
The performance of the collections sector in the recovery of these loans will have an economic impact for years to come, as the UK itself seeks to bounce back from Covid-19.
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