Banks are warning that small businesses will never repay up to half of the Bounce Back Loans that have been taken out.

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Moreover, when this happens, the Chancellor should prepare for the collapse of hundreds of thousands of small businesses.

Three senior bankers have warned that between 40 per cent and 50 per cent of the 608,000 borrowers who have taken out £18.5bn of Bounce Back Loans could eventually default on the debt.

Although the Government has said it will guarantee 100 per cent of the loans up to £50,000, it is still down to banks to pursue defaulters for the debt.

Executives say it would be logistically impossible to take hundreds and thousands of small, often family-run businesses to court, and that it would be a PR disaster for high street banks.

“Some arrangements will have to be made. A lot of them will be written off or converted into something else,” one bank chairman told the Financial Times. “In most cases the idea of the government taking equity in these companies is unrealistic — they are simply too small. So the question is what’s going to happen to all of these loans?”

RBS calls for bad loan quarantine

Meanwhile, the chairman of the Royal Bank of Scotland has called for the creation of a vehicle to clean up bad debts left by businesses unable to repay all coronavirus emergency loans, not just Bounce Back Loans.

Sir Howard Davies told the Sunday Times that a recent survey showed there was a risk that “several billion pounds of public money” might not be paid back from government-backed Covid-19 loans issued since the March 23 lockdown.

Nearly half of small businesses that have taken out government emergency coronavirus loans do not intend to repay them, according to the Business Banking Resolution Service.

Forty-three per cent of businesses that have taken out either Bounce Back Loans or Coronavirus Business Interruption Loans say they do not believe the government will chase the debt, or that they will be unable to repay the loan, according to the BBRS survey.

Davies has suggested that if emergency coronavirus business loans are not repaid, they would have to be a “holding entity that will hold these loans and convert them into some equity-like structure.”

All banks suffering defaults would be able to put BBLs and CBILS bad debts into the fund, he said.