One in every five loans made to small companies and underwritten by the taxpayer under a £2.3 billion government credit scheme has ended in default.
The government has admitted that 20.2 per cent of enterprise finance guarantee (EFG) loans went sour, raising fresh questions about a scheme that is the subject of an internal investigation by Royal Bank of Scotland.
The default rates — about 15 per cent higher than would be expected under normal commercial lending — will heighten concerns that banks abused the scheme to pass risky small business liabilities on to the taxpayer.
The EFG provides a 75 per cent guarantee to lenders willing to support viable small businesses that lack the security to obtain a bank loan. It has been alleged that banks incorrectly told businesses that the taxpayer guarantee was for their benefit, rather than for the lender. RBS has admitted such mis-selling.
However, there are fears that on some occasions EFG was used as a liquidity tool by banks as a low-risk way to ditch unprofitable loans rather than to support new business lending.
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In December, Adrian Bailey, chairman of the business, innovation and skills select committee, aired concerns that the scheme “includes a perverse incentive to close businesses, rather than develop them”.
Last month, the committee called for the government to “outline what actions it will take to address the issue”. The government admits that lenders used the taxpayer guarantee to re-finance small business lending.
Stuart Garner, the chief executive of Norton, the motorcycle manufacturer, alleged that Fireworks International, a company he ran, was put into RBS’s global restructuring group, its contentious turnaround division, after it took out an EFG loan in 2009.
“The infamous global restructuring group got hold of my business and . . . liquidated me because claiming back that government loan at 75 per cent plus what I had already paid made it a significant profit pot,” he claimed. “I was told by the bank that it would not have liquidated me if it did not have the government guarantee.”
The Serious Fraud Office has been examining RBS’s use of EFG as part of a wider analysis of high street lenders’ restructuring activities, The Times understands. There is no suggestion that a formal inquiry is imminent.
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The activities of the restructuring group are also the subject of a Financial Conduct Authority investigation.
There have been 1,456 instances — 6.4 per cent of all EFG loans — in which banks used the scheme to replace existing facilities, such as overdrafts, rather than to provide new lending. Almost one in three of these loans ended in default.
Less than half are “active and being repaid as scheduled”, although the government said that “it is reasonable to expect that, without the benefit of the EFG-backed refinancing, a very significant proportion of these businesses could have otherwise failed”.
Under the terms of the scheme, restructuring activity must not exceed 20 per cent of the value of the banks’ overall EFG loan book. There is also a cap on how much banks can claim back from the government.
A spokesman for the business department noted that not all defaults necessarily lead to a claim on the government guarantee. By the end of last year, 13 per cent of all EFG loans had ended in a bank making a claim on the taxpayer.
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The government also said that if default rate is measured by value, rather than by volume, of the £2.3 billion facilitated by EFG it is lower, at 11.5 per cent.
RBS declined to comment.