Bank loans? Let’s to the maths
There are horror stories about banks taking advantage of the COVID-19 crisis to make money for themselves. Whilst some of these stories are hard to validate, what we can do is some simple 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.