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Law360, London (October 7, 2020, 1:38 PM BST) -- Fraudsters exploiting Britain's government-backed pandemic loan scheme and companies defaulting on their repayments could cost the U.K. up to £26 billion ($33 billion), the country's budget watchdog said on Wednesday.
The National Audit Office said that crooks are exploiting the government's coronavirus loan scheme, which it announced in April to allow small companies and sole traders to borrow up to £50,000 from banks during the crisis.
The regulator said it also estimates that up to 80% of businesses that have borrowed money under the lending program will default on their repayments. The combined risk of defaults and fraud mean that up to 60% of borrowers may not pay their bank back.
"Assuming the scheme lends £43 billion, this would imply a potential cost to government of £15 billion to £26 billion," the National Audit Office said in a paper published on Wednesday.
The watchdog said that the actual extent of losses to the public purse will not be known until borrowers are required to begin paying back their loans in May 2021. The government expects banks to have lent between £38 billion and £48 billion by November, which is when the loan program closes.
The audit watchdog said the government "prioritized one aspect of value for money — payment speed — over almost all others and has been prepared to tolerate a potentially very high level of losses as a result.
"These losses can stem from businesses wanting to pay back loans but finding themselves unable to, through to organized criminals taking out loans with no intention of ever paying them back," it continued.
The loans are provided by commercial lenders directly to businesses that are expected to repay the debt in full or face a downgrade to their credit score. The government provides lenders with a 100% guarantee against the loan, meaning that it will step in to repay the lender if a borrower defaults.
But lenders are not obliged to perform credit or affordability checks so that they roll the loans out more quickly. Some businesses cannot afford to repay their loans as a result, the spending watchdog warned.
Data from HM Treasury shows that banks and building societies have given businesses more than 1.2 million loans, totaling £36.9 billion since the scheme opened in May, the National Audit Office said.
The government also announced the business interruption loan scheme in March, which offered loans of up to £5 million for businesses with turnover of £45 million or less. That was extended to larger companies, which could secure loans of up to £25 million, while businesses with turnover of more than £250 million could gain loans of up to £50 million.
--Editing by Ed Harris.
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