Bank forbearance, but not for long – Why the banks are calling in loans to SMEs
Small and medium enterprises (SMEs) should be wary that while they may have survived the difficult years since 2008, things may be about to get tougher as the forbearance of the banks, which kept many businesses afloat, may be coming to an end.
During the recession, many businesses that struggled to make ends meet were put in the banks’ ‘intensive care’ department; where they were offered a significant amount of leniency. In other words, the banks cut them a lot of slack over their debt repayments.
This wasn’t done out of the warmth of the bankers’ hearts – they knew that if the business were to go under, they would have to write off a considerable part of, and in some cases all, the debt – causing a considerable loss.
The quid pro quo for the banks was that by helping these embattled businesses stay afloat through the difficult times, they would be in a much better position to reclaim their monies owed once the companies began making money again.
From the banks’ point of view, these debts were considered ‘bad debts’ which they would eventually want to clear from their balance sheet. However, to do this all in one go would have been catastrophic.
There’s a good parallel to be made here with Greece. At the height of its economic crisis, its huge amount of uncollectable debts would have caused further economic destruction had the EU not rallied around to lessen the impact on other countries.
As a company comes out of a recession, the next logical step for the banks is to begin selling off their loan portfolio in chunks to hedge funds and other institutions. This debt is usually sold for 30-60p in £1 and although the banks are not recovering the full amount of the debt, they don’t have to deal with the collection, which in itself would incur considerable time and cost.
The hedge funds that buy the debt also acquire the security over any assets the business might have, and set about trying to collect this debt and even appointing administrators or receivers in the worst cases. The banks have very little choice but to do this to enable them to clear up their balance sheets, and free up capital in order to loan again to businesses that are still healthy after the recession - as well as start-ups and new ventures.
Calling in their debts
If your business has benefited from the considerable forbearance shown by the banks over the past few years, it is important to be aware that once the forbearance is ended, the bank will be looking to reclaim its money. Although this may seem a cruel step to take, the banks’ hands are tied as they now face stricter regulations on capital ratios - part of the Basel III regulations – which mean that without an adequate capital ratio, they are unable to lend. These regulations are in place, in part, to prevent a repeat of 2008 - where many banks did not have enough to lend and were in fact being far too risky with their loans.
In February the Bank of England announced that business lending was still falling, despite mortgage lending being at a six-year high. Until the banks are able to reclaim the debt from business loans taken out pre-2008, they will not be able to boost their capital adequacy ratios enough to fulfill the criteria for further, essential lending to SMEs to allow the UK economy to flourish.
So the reality is that while interest rates remain low, banks will increasingly start to call time on the business loans they have shown so much forbearance on for so long.
If you have a business loan and have any concerns about your ability to meet the bank’s repayment demands, you should contact an insolvency practitioner immediately as they will be able to guide you through this process. The earlier you seek expert advice, the better!
Brian Johnson, Business Recovery Partner, HW Fisher & Co
T 020 7380 4989