Up to £26bn in expected defaults and fraud losses on bounce back loans is a very big number.
The National Audit Office’s estimate is a measure of the banks’ success as government functionaries shelling out cash to rescue more than 1m small businesses during the pandemic.
It could also be a measure of the banks’ potential failure. After all, £26bn out of £43bn in bounce back loans is a lot to pursue in a year or so when payments start to fall due. That won’t make debt collectors popular.
Debt collecting hasn’t made banks popular in the past. Their strong-arm tactics put SMEs off borrowing long after the last financial crisis.
So far during this crisis, high-street lenders have largely dodged the reputational mantraps.
Rishi Sunak devised bounce back loans as a click ’n’ collect way of shelling out up to £50,000 to small businesses to keep them going through the pandemic. He gave the banks a 100 per cent guarantee. Eight in 10 applications were approved, quickly. Good for the big banks, provided they can keep it up. The added bonus was that high-street banks extended their dominance in SME lending.
We won’t know the full extent of bad debts until repayments fall due after the first 12 months of interest-free credit. Then comes the banks’ next big reputational test. No one wants to be the bad guy collecting debts.
Lenders will have to collect nonetheless. But as it stands, the government’s agreement with the industry could mean banks need not put much effort or resources into collecting the debt on taxpayers’ behalf. Lenders can claim on the government guarantee without having completed the job of recovering the government’s money. The NAO suggests banks have more incentives to write loans off fast and will be less bothered about recovering outstanding debt. It calls on lenders and government for a robust debt collection plan.
The banks and the Treasury are hammering out the details. The terms will determine how forceful the banks will have to be and what they could lose. They may yet emerge as good guys if they can establish imaginative ways of helping companies manage their debt burden or even turn it into something lighter and more flexible. Debt forbearance is a way of winning SME hearts for decades. Or at least until the next crisis.
Frasers’ Fearless 1,000
Mike Ashley wants employees to embody his Frasers Group values of “not hesitating, thinking without limits and owning it”. Lucrative rewards await the 1,000 who do so best after shareholders voted through his “Fearless 1,000” bonus plan by more than 99 per cent.
Few could encapsulate Frasers’ — formerly Sports Direct’s — values as well as magic Mike. He surely didn’t hesitate when he reportedly drank 12 pints with vodka chasers and vomited into a fireplace. He showed thinking without limits when he awarded lucrative contracts to family members including his brother and future son-in-law. And with 65 per cent of the shares in Frasers, he really does own it.
Lombard recalls other incentive schemes that have purported to share the wealth. The Persimmon 140, as it might have been called. That was the plan that eventually paid housebuilding boss Jeff Fairburn £75m. But it was billed in 2012 as a scheme for a much broader set of senior managers — roughly 140 of them — handing the group 10 per cent of the company when they met unchallenging dividend targets.
Unlike Persimmon’s scheme, however, Frasers’ — while not perfect in every way — is not egregious. Mr Ashley as chief executive and his family are excluded, as are other executives and consultants.
When Boohoo launched a new £150m bonus scheme this summer, up to £100m was reserved for co-founders Mahmud Kamani and Carol Kane with another 16.7 per cent of the pot earmarked for one of Mr Kamani’s sons.
As with Boohoo’s scheme, there are testing share price hurdles. Frasers’ shares have to rise above £10 for it to pay out — almost three times where they are now. There is a system for scoring employees quarterly, with some checks against anomalous results. Top awards are roughly 100,000 shares apiece.
True, the Fearless 1,000 lacks conventional performance measures common in bonus schemes, such as environmental standards or tests of profit, cash flow or leverage. And giving each of the top 10 most fearless a million quid might seem excessive.
But making the plan — and another cash bonus scheme for all employees — pay out based on share price performance at least aligns employee incentives neatly with those of Mr Ashley. Having taken no salary or bonus for years, he is solely share-price driven. The group’s executive pay restraint is laudable. So is the £246m it has paid out in staff share bonuses since 2007. It is hard to begrudge paying ordinary employees more — even if Fearlessness is a characteristically Mike Ashley way of doing it.
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