The Bounce Back Loan Scheme was announced on 27 April 2020 to quickly provide loans of up to £50,000, or a maximum of 25% of annual turnover, to registered and unregistered small businesses to support their financial health during coronavirus.

The Department for Business, Energy & Industrial Strategy (BEIS) and the British Business Bank expect the scheme to lend £38bn to £48bn by 4 November, substantially exceeding the predicted £18bn to £26bn at launch.

But the NAO is warning that the speed with which the scheme was rolled out heightened the fraud risk, with self-certification, multiple applications, lack of legitimate business, impersonation and organised crime the key factors in fraud cases.

The scheme places the responsibility for managing fraud risk on the lenders as part of the loan approval process.

To support lenders, the British Business Bank established fraud prevention forums to share best practice and aid implementation of additional fraud measures, including a method to prevent duplicate applications.

However, the British Business Bank is currently unable to estimate the overall level of fraud.

As of 6 September, government data shows that the scheme has delivered more than 1.2 million loans to businesses, totalling £36.9bn. About 90% of the loans have gone to micro-businesses with turnover below £632,000.

The real estate, professional services and support activities sectors received the largest amount of support – £8.5bn from 283,000 loans.

Bounce Back Loans are delivered through commercial lenders such as banks and building societies, with the government providing lenders with a 100% guarantee against the loans.

The NAO found that lenders approved loans for existing business customers within 24 to 72 hours but approval times for new customers takes substantially longer.

The government imposed less strict eligibility criteria for the Bounce Back Loan scheme than other coronavirus loan schemes, to improve quick access to finance for smaller businesses.

The NAO says this lower level of checks presents credit risks as it increases the likelihood that loans are made to businesses which will not be able to repay them, leading to losses of taxpayers’ money.

A third-party review commissioned by the British Business Bank found that, while some risks can be mitigated, there remains a “very high” level of fraud risk.

The BEIS and the British Business Bank have made a preliminary estimate that 35% to 60% of borrowers may default on the loans.

Assuming the scheme lends £43bn, this would imply a potential cost to government of £15bn to £26bn.

The NAO says that over the coming months, the extent of losses due to fraud will become clearer, but the full extent of losses won’t emerge until the loans are due to start being repaid from 4 May 2021.

Gareth Davies, head of the NAO, says: “With concerns that many small businesses might run out of money as a result of the Covid-19 pandemic, government acted decisively to get cash into their hands as quickly as possible.

“Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct. Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse. It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.”