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* Unprecedented demand leads to record loan originations
* Government-backed loan schemes not a 'free-for-all'
* Bankers fear repercussions of poor lending decisions
* Coronavirus challenging bank processing, reputation
By Sinead Cruise, Lawrence White and Iain Withers
LONDON, April 3 (Reuters) - With the future of many
coronavirus hit firms in their hands, British banks, still
scarred by the financial crisis, are worried that they are being
asked by a desperate government to make loans that will never be
repaid.
This caution, combined with the challenges of an
unprecedented demand for loans, is testing the British public's
fragile faith in the lenders, which have spent a decade trying
to rebuild their battered reputations and capital positions.
"We've got to only make loans that we can reasonably believe
people will be able to repay after the crisis has gone; to
businesses which will still be there," Ian Rand, who runs
business lending at Barclays, told Reuters.
Government, banks and regulators say there is no shortage of
capital to support businesses under a $400 billion government
relief package for struggling companies.
But of around 130,000 inquiries received as of Friday for
the Coronavirus Business Interruption Loan Scheme (CBILS) for
smaller firms, only 1,250 loans totalling some 145 million
pounds ($179 million) had been made.
A separate Bank of England programme to support larger firms
has so far provided 1.9 billion pounds of support.
"The scale of this process and the speed with which it has
been put in place has been more than expected. The volume has
been absolutely massive, calls went up by 45 times," Royal Bank
of Scotland Chairman Howard Davies said on BBC Radio,
adding that the lender had rehired retired staff to help it out.
Bank call centres were initially overwhelmed by applications
for help from firms who were ineligible or who believed the
scheme offered handouts instead of more debt, highlighting the
wider impact of the coronavirus crisis on the economy.
British finance minister Rishi Sunak on Friday extended
support to mid-sized firms, those with annual turnover of
between 45 million to 500 million pounds, that had been
effectively excluded from the initial package.
Bankers welcomed the ditching of a requirement to assess
whether a business was first eligible for a commercial loan
before being accepted in the scheme.
A study by the Corporate Finance Network before Friday's
changes found nearly a fifth of small companies were unlikely to
survive the next four weeks, despite the state support net.
TERMINAL DECLINE
With government guarantees covering 80% of the value of a
loan, banks are on the hook for the remaining 20%, leaving
bankers feeling caught between the pledges of relief and a duty
to safeguard taxpayer and shareholder cash.
The banks, who were saved by taxpayer funds in 2008, were
put on notice this week by business minister Alok Sharma who
said it would be "completely unacceptable" them to abandon
"good" businesses in financial difficulty.
"It's all very well saying ... you are making a scheme
available, it's another thing to put it in operation quickly,"
Andy Halford, Standard Chartered's chief financial
officer said, adding "the devil is in the detail".
An executive at one smaller British bank, who declined to be
named, acknowledged a "public duty" to help those in need but
said there were limits to what could be offered.
"At the moment it's about survival for these businesses that
have had a huge hole blown in them," said another executive,
adding that his bank was prioritising existing clients but would
struggle to help others.
Naresh Aggarwal of the Association of Corporate Treasurers
said many of its member companies that were otherwise viable
were struggling, but acknowledged banks are in an unenviable
position.
"There is a real risk that in two or three years' time, we
realise companies that were saved really shouldn't have been
saved because they were already in terminal decline," he said.
Analysts at KBW calculate that bad loans for the top British
banks are likely to hit 31 billion pounds in 2020, some 23
billion pounds more than forecast prior to the pandemic.
The FTSE 250 mid-cap index is full of firms with thousands
of staff and turnover in the billions, many of which are wholly
dependent on their banks to provide them with borrowing
facilities, Aggarwal added.
"There are some businesses that are re-engineering
themselves, and which are the future, but who will just get
crushed because they can't present the right numbers right now."
DISASTER FOR EVERYONE
Bankers have been pressing politicians and regulators for
leniency in the way forbearance - effectively a blind eye to
faltering borrowers - is recognised in accounts.
Failing loans that aren't repaid or restructured typically
require hefty provisions and lenders are concerned that backing
poor prospects now will later lead to huge losses.
The Bank of England issued guidance clarifying that relief
offered to firms should not automatically be classed as
impairments and warned against making dire forecasts when the
outlook remained so uncertain, but concerns remain.
While the stimulus would help mitigate an economic slowdown,
credit ratings agency Moody's said it could weaken banks' asset
quality and could lead to a significant increase in bad loans.
"They're now faced with making decisions on who to provide
additional flexibility to or not and they're not throwing their
risk appetite out of the window," Laurie Mayers, associate
managing director at Moody's, said.
This balancing act by the banks will be crucial for the
shape of the business landscape once the crisis recedes.
"It is a disaster for everyone - but unless we save SMEs
there will be little to stimulate recovery," said Jasper Smith,
founder of Vala Capital, which invests in tech, gaming, food and
engineering start-ups.
($1 = 0.8110 pounds)
(Editing by Alexander Smith)
