UK firms will have borrowed more than £60bn by December 2021

Banks lent UK firms a total of £35.5bn ($48.8bn) in net terms last year – £34.7bn of which was lent since the start of the pandemic in March.

According to new research by EY Item Club, a further £26bn in lending is forecast by the end of 2021, and many firms are unlikely to start repayments until 2024.

Last year’s figure was £25bn more than was borrowed on average over the previous five years, before the onset of the pandemic, the research found.

While bank lending (including COVID-19 related government-backed loans) has been vital to businesses of all sizes during the pandemic, for SMEs it has been particularly critical. Following the UK’s third national lockdown, it is predicted that many businesses are unlikely to start making inroads into repaying their debt until 2024.

COVID-19, and the subsequent lockdowns, has also had a considerable impact on bank lending to households.

Net lending via credit cards and personal loans turned negative in 2020, falling by 9.9% — the largest drop since records began in 1994.

In addition, while demand for consumer credit is expected to enter positive territory in 2021, it is only set for a small pick-up this year (a 2.1% rise).

As for future big-ticket purchases, which in part drive consumer borrowing, it is predicted that some households will finance these using lockdown savings, rather than credit this year , suggesting that any rebound in consumer lending will remain subdued.

The EY ITEM Club for Financial Services report expects that the stock of consumer credit will grow marginally this year by 2.1% and close 2021 at £206bn (compared to £202bn in 2020), reflecting the prospect of heightened unemployment and continued consumer caution.

As for mortgage lending, this remains subdued; it is predicted to grow by 2.3% this year, down from the 3% in 2020. These forecast figures are modelled on the assumption that the current COVID-19, and the subsequent lockdowns, has also had a considerable impact on bank lending to households.

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These forecast figures are modelled on the assumption that the current lockdown lasts over Q1 and then restrictions are steadily relaxed as the vaccination programme is rolled out, allowing the country and economy to reopen again.

Anna Anthony, UK Financial Services managing partner at EY, said of the debt facing business: “The prospect of some, if not many firms, not being able make the required repayments is concerning for all involved.

“As well as rising loan losses, banks are contending with another year of squeezed interest margins and subdued consumer lending. Insurers too are facing a tricky year, with ongoing COVID-19 related pay-outs, persistent low interest rates and the impact of the FCA pricing review.”

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