Business lending is forecast to reach a 13-year high this year because of the Covid-19 pandemic.
An EY Item Club Interim Bank Lending Forecast has predicted that business lending will rise by 4.4 per cent this year, up from a two per cent increase in 2019, as firms look to cover the cost of falling revenues.
Lending rose annually from 0.6 per cent in February to 11.1 per cent in May, boosted by the government’s emergency loan schemes.
The research predicted lending growth to slow to 7.1 per cent next year, due to increased business costs when the government’s furlough support ends. As a result, fewer firms will be able to take on more debt, the analysis said.
EY Item Club expects that firms will not start repaying additional debt, such as government-backed loans, until 2022.
“Covid-19 has caused unprecedented challenges for the UK economy, putting financial strain on both businesses and households, and has resulted in a staggering amount of money being lent to firms over a short period of time,” said Omar Ali, UK financial services managing partner at EY.
“With a weakened economy, banks face increasing write-offs on all types of lending and, with slow growth for consumer credit forecast, this will add pressure to their profitability and ultimately their ability to lend more to businesses to help kick start growth.”
Conversely, the pandemic has led to a huge fall in bank lending to households, with demand for consumer credit predicted to drop by 15.9 per cent this year – the biggest annual fall since records began in 1993.
As net lending for credit cards and personal loans turned negative during the lockdown, EY has predicted that consumers will continue to be cautious of taking on more debt. It said that it expects the consumer credit market will not to return to 2019 levels until 2022.
While payment holidays have created breathing space for borrowers, the economic impact of Covid-19 will cause a rise in overall loan losses, EY Item Club said.
The rates of loans written off is predicted to increase from 1.5 per cent this year to 2.5 per cent in 2021, a near-decade high.
As some firms will struggle to repay loans, banks will also suffer from losses in the next few months, the research predicted.
Business loan losses are predicted to rise from 0.3 per cent in 2019 to 0.6 per cent this year and 0.7 cent in 2021.