Bank loans? Let’s to the maths
With the Coronavirus Business Interruption Loan Scheme we would suggest that no bank can justify charging term loan rates in excess of 10%.
And here in a nutshell is why:
- Interest rates are traditionally set relative to the Bank of England base rate. This currently stands at an historic low of one tenth of one percent.
- Government has said it will pay the interest on the loan for the first year, pay bank loan arrangement charges and guarantee 80% of the loan.
So if a business were to take out a loan of £10,000 over three years (loans under the current scheme can run for up to 6 years), what is the exposure of the bank?
We can argue about charges, but let us say the bank would charge a £200 arrangement fee. That is paid for by the government.
- After month 1 the customer will repay £277. The government will pay one months interest of £83. The banks has now received £560 (including the up front charges)
- After month 2 the customer will repay a further £277. The government pays interest of £81. The banks has now received a total of £918 (200+ 277+83+277+81).
- After month 3 the customer will repay £277. The government pays interest of £79. The banks has now received £1274.
- After month 4 the customer once again pays £277 and the government interest of £76. The banks has received £1,627
- After month 5 the bank receives £277 in loan repayment and £74 in interest. The bank to date has received £1,978
Remember the bank has got a government guarantee of 80% of the loan of £10,000. Which means government will pay up to £,8000 leaving the bank exposed to £2,000.
So what you can see from the worked example (apologies the numbers are crude approximations) is that after just 6 months, charging 10% interest, the bank will make a profit even if the customer defaults.
If a bank does not have the tools to hand to determine that a customer can last 6 months ahead, would it not be better for the government to set up a nationalised bank. If for nothing else to ensure that money that is distributed is distributed fairly and at a fair price.
And if banks cannot see that, we have to question the future for a private banking system.