Banks should insure loans to small businesses, thinktank says
ResPublica director Phillip Blond says mandatory loan to insure loans ‘could build confidence in lenders to lend’.
Banks should be forced to insure loans to small and medium sized businesses to guard against bankruptcies and encourage lending, according to an influential think tank.
Consumer lending should also be protected with insurance to encourage a wide range of lenders to make up a shortfall in the UK’s market for loans that amounts to £40bn a year, said ResPublica, which came to prominence as an adviser to David Cameron on localism and mutualising public sector organisations.
Phillip Blond, the thinktank’s director, said a mandatory scheme to insure loans “could build confidence in both lenders to lend and borrowers to borrow and could potentially unlock billions in consumer spend”.
Blond said he was concerned that the government’s efforts to kickstart lending had failed to bridge the gap between businesses and consumers that want to borrow and anxious banks nervous about lending. Bank of England figures showed lending to businesses continued to fall despite the central bank’s funding for lending scheme that makes cheap loans available to a wide range of banks, building societies and leasing companies.
One credit union, which offers loans to staff in the airline industry, has taken up the idea, but Blond said the treasury could make an immediate impact if it told state owned banks to adopt the scheme.
Treasury officials are likely to be nervous about the idea, which could be viewed as a re-working of the infamous payment protection insurance scheme, which turned into one of the biggest financial services sector scandals that has cost banks and other lenders more than £10bn in costs and compensation.
Insurance adds to the price of a loan, either in the form of a higher interest rate or an extra monthly payment. PPI insurance could add as much as a third to the cost of loan and was blamed for thousands of borrowers declaring themselves bankrupt.
Blond says in his report Risk waiver: closing the protection gap and easing the flow of credit that the debt waiver insurance would be an “ethical financial safeguard” that overcomes the problems inherent in PPI, with only a small charge attached to each loan. In the event of a failure to pay the loan under certain circumstances, the lender would waive that loan instalment on behalf of the customer.
“SMEs, the workhorses of the economy, are being denied opportunities for growth. Lending to the small business market has dropped by 25% since 2008, and UK loan rejection rates are twice those of France and Germany,” he said.
Several lending groups have approached the Treasury to promote insurance schemes that would cover the costs of bad loans. The most popular involves the government underwriting the first 3% of all losses on loans, on the basis that lenders will commonly cope with 3% of their loan book failing to repay. Lenders would pay a fee for the government protection scheme, which would be added to the cost of the loan.
Blond said a private sector scheme could be made to be transparent and low cost while offering protection to borrowers as well as lenders.
Similar schemes are popular in the US and Canada and insurer CUNA Mutual, which has been offering waiver products in the US for more than 75 years, said it will offer its first “waiver partnership” to airline credit union Plane Saver, which has 8,000 members.
The scheme, which is backed by the Tory MPs Ian Liddell-Grainger and Heather Wheeler MP, was developed following a 58% decrease in UK credit supply to consumers and small businesses.
“This has, in turn, affected consumer spending and business growth, resulting in a substantial decrease in the UK’s GDP. The paper projects the loss to the GDP from the contraction in lending between 2007 and 2012 to be worth around £193bn,” said the report.
Paul Walsh, the boss of CUNA said: “Although not everybody offering PPI was misselling it, everybody is paying the price of the widespread deception that went on – consumers, lenders, businesses and ultimately the UK economy. The time has arrived for lenders to proactively respond to their consumer’s needs and help them overcome their fears and address this inertia in the lending market.
“Many lenders want to offer a real solution to the ‘protection gap’ that would benefit and protect both them and their customers. We know, from experience, that the CM Waiver will provide that solution,” he said.