UK firms will have borrowed over £60bn by the end of the year, having borrowed £35.5bn last year, with a further £26bn forecast to be borrowed by the end of 2021, according to the latest EY ITEM Club for Financial Services Forecast.
Last year’s figure was £25bn more than what was borrowed on average over the previous five years, after firms sought funds to support them through the effects of the pandemic.
EY said that while bank lending, including government-backed support loans, has been “vital” to businesses of all sizes during the pandemic, it has been “particularly critical” for SMEs.
Nonetheless, following the UK’s third national lockdown, it is predicted that many businesses are unlikely to begin repaying their debt until 2024.
It found that Covid-19, and the subsequent national lockdowns, has also had a “considerable impact” on bank lending to households, with net lending via credit cards and personal loans falling by 9.9% in 2020, the largest drop since records began in 1994.
In addition, demand for consumer credit is expected to rise by only 2.1% in 2021, while demand for mortgage lending is expected to remain subdued, growing by 2.3% this year, down from 3% in 2020.
According to EY, these forecast figures are modelled on the assumption that the current lockdown lasts over Q1, with restrictions steadily relaxed as the vaccination programme is rolled out across the UK.
Anna Anthony, UK Financial Services managing partner at EY, said: “Financial services firms entered the pandemic in a position of capital strength and have continued to support the economy and business through one of the most testing periods we have ever faced. That being said, there are a significant number of current challenges, and more that lie ahead.
“By the end of this year, businesses will have borrowed in the region of £60bn net since the start of the pandemic, which is a colossal amount, especially as for many it is just about survival, not expansion or growth. And the prospect of some, if not many firms, not being able make the required repayments is concerning for all involved.”
She added: “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.
“However, it’s not bleak across the entire sector, and the outlook is a little more positive for UK asset managers in 2021 and beyond, with assets under management (AUM) set to rise in 2021 and 2022 as global markets recover.”