Banks are estimated to have prevented more than £1 billion in fraud by rejecting almost 27,000 applications for loans under the government’s emergency scheme for small businesses.
In evidence to the Commons public accounts committee, the British Business Bank, the government-owned economic development bank, said lenders had rejected 26,933 bounceback loans over concerns they could be fraudulent. It means criminals were prevented from stealing £1.1 billion from the £40 billion scheme.
Almost 1.4 million companies have received support with the majority through the bounceback scheme.
Millions of businesses have relied on the loans to stay afloat. The Government has said that the scheme could cost the taxpayer between £15 billion and £26 billion, in part because of fraud but also due to defaulted loans.
Banks were told to only perform the most basic checks on the businesses they were lending to. The priority was not to stop fraud, but to move billions of pounds into companies to support the wider economy.
The letter from the British Business Bank, published before a committee hearing into the scheme, came as business groups and MPs warned that plans to extend the loan scheme to help companies survive the second lockdown in England will be hampered unless lenders open accounts for struggling first-time borrowers.
In her evidence to the committee, Sarah Munby, permanent secretary at the Department for Business, Energy and Industrial Strategy, told MPs: “We were consciously understanding that there would be fraud because of choices made about the design of the scheme.”
The scheme was launched in May after ministers were told that other loan options were not reaching some of the smallest businesses.
However, when the bounceback loan scheme launched, the Treasury promised to reimburse the banks for the full loans if they were not repaid. The checks were reduced and money was often paid less than 24 hours after an application was filed.
Sir Tom Scholar, permanent secretary at the Treasury, told MPs the scheme significantly reduced the process of loan application and approval.
“On the one hand that certainly made it easier and quicker for businesses to make their applications and for lenders to approve them,” he said. “But on the other, it reduced the checks that lenders were able to make, it reduced their ability to apply all their normal conditions and minimise the risk of fraud and error and so on.”