UK banks are preparing a code of conduct to prosecute companies that default on taxpayer-guaranteed coronavirus loans, as the industry estimates as many as eight in 10 borrowers may fail to repay in full.

The Guardian understands that industry lobby group UK Finance and the state-owned British Business Bank have entered into talks with commercial lenders with the aim of setting standards for debt collection across the board. industry long before the repayments are due.

Loans made under the Coronavirus Business Interruption Loan Program (CBILS) and Rebound Loan Program (BBLS) for Small and Medium Businesses have a 12 month pay-off period, and on the first batch, this will run out in the spring. from 2021.

Discussions about what is happening with delinquent loans are still in their infancy. However, a banking executive said the industry-wide “code of conduct” on collections would likely result in a “leaner approach” that some banks might be accustomed to with regular business loans. Each bank usually has its own policy on what to do in the event of a default.

“It’s really important for customers to get fair and equal treatment. If they have a bounce loan with Barclays or HSBC it doesn’t seem heavier in one place or another – it’s agreed, ”they said.

BBLS comes with a 100% government guarantee, which means that the state will cover a bank’s losses if a customer does not repay their loan. CBILS, on the other hand, comes with an 80% guarantee, meaning that banks will have to bear 20% of potential losses. However, banks are supposed to try to recover the full amount before accessing the collateral. The aggressiveness with which they will pursue these debts is at the center of the discussions.

Industry estimates suggest that between 40% and 80% of companies could default on their rebound loans, the bank official said. Part of that will be due to fraudulent apps, which are said to account for around 10-15% of total BBLS, they added.

A city working group warned last month that £ 36bn in government guaranteed loans could turn toxic by next year, as businesses struggle to repay growing debts during the Covid-19 crisis.

Government data released earlier this week showed banks had approved more than a million loans worth £ 42.9 billion as of June 28, including £ 11 billion from CBILS and 29.5 billion billion pounds sterling from BBLS. Most BBLS borrowers are small business owners or independent traders who have never taken out a business loan.

There is currently no deadline for setting a standard for debt collection, but a leading banking source said that “decisions need to be made fairly quickly. The conversations have started, but we have to get to a point where we know what position we are in.

Bankers are desperate to protect their reputations after scandals such as the one that engulfed the Royal Bank of Scotland’s Global Restructuring Group (GRG), which was accused of “”systemic and widespread abuse of SMEs between 2008 and 2013.

“Banks also want to make sure they honor long-term government guarantees. They don’t want to do anything that puts it in danger, ”said the bank manager. Losing access to government guarantees could leave banks with billions of pounds in losses when companies default.

UK Finance and the British Business Bank – which runs the state-guaranteed loan programs – are holding a series of meetings with different groups of banks, which will continue over the next few weeks, another source familiar with the talks confirmed.

A British Business Bank spokesperson said: ‘The British Business Bank has regular meetings with lenders, UK Finance, HM Treasury and others to discuss how the government’s Covid-19 response to guarantee programs works. loan. Other topics discussed include the need to treat clients fairly if debt collection is required in the future. “

UK Finance declined to comment.