Negative Interest – Positive for business?

Financial Support

Forced into lockdown by the Coronavirus pandemic, the world economy will, according to Gita Gopinath the International Monetary Fund’s chief economist, face it’s worst recession since the 1930’s with an estimated 3% contraction globally.

In the UK, GDP slumped by 5.8% in March, a record fall and Bank of England deputy governor Andy Haldane predicted an unemployment crisis on the scale of the 1980’s.  Chancellor Rishi Sunak has warned that the UK is facing a significant recession and with the battle against Coronavirus set to go on for the foreseeable future it is unclear how quickly the economy will recover.

Financial support to business with CBILS and BBLS

The Chancellor reacted to the initial lockdown by announcing a range of measures to offer financial support to business with CBILS and BBLS being prominent amongst the support offered.  However problems have been reported with CBILS in particular with many applications failing to progress beyond the enquiry stage.  Nils Pratley, writing in The Guardian reported that by mid April only £1.1bn had been lent to just 6,020 firms with Royal Bank of Scotland having lent approximately half of that.  With relatively low success rates, just 28,461 of the c300,000 enquiries progressing to actual applications by mid April, there is a suggestion that Government reluctance to offer 100% CBILS guarantee rather than restricting this to just the BBLS scheme which has a £50,000 maximum loan value has seen a reluctance to lend from the Banks.

Clearly steps will need to be taken to inject cash into the economy and comments emanating from the Bank of England recently have resurrected the prospect of negative interest rates pushing the cost of borrowing down to nil.

The More reserves you hold the more you are charged

Traditionally interest is seen as the charge for borrowing with rates of interest charged varying in accordance with the associated risk.  Simply put borrowing £100 at 10% interest rate means a charge of £10, making £110 repayment.  A negative interest rate of 10% would mean a repayment of £10 making £90 repayable.  This is counterintuitive with lenders paying borrowers money to borrow from them.  To recoup this charges are placed upon credit balances held by the lender meaning the more reserves you hold the more you are charged.

In simple terms this means that excess reserves held by financial institutions at the Central Bank will incur charges and may stimulate the Banks to get rid of this cash by way of loans, making the 80% government CBILS guarantee appear more attractive and keep the Banks lending as Government support measures are inevitably phased out.

Significant shortages of cash

So as the economy slowly emerges into the new normal and the government begins to phase out its support, businesses will edge closer to a cash hole built up whilst surviving lockdown.  Deferred VAT and taxes will become due, as will unpaid rents and stretched creditor payments.

Many business will face significant shortages of cash whilst they get their own houses in order and negative interest rates, encouraging Banks to deplete excess reserves and give affordable loans could end up being positive for business.

If your company is experiencing financial problems, as a result of the Covid-19, please get in touch to discuss your current situation and the options available. Our skilled and experienced team of Insolvency Practitioners will help you find a solution. Please call us now on 0330 159 8080 for a FREE confidential initial consultation.

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