By Scott Wright

THE huge number of firms in distress because of the coronavirus fallout has raised the prospect of ‘bad banks’ being set up again to deal with toxic assets.

The aftermath of the financial crisis famously saw Royal Bank of Scotland establish a bad bank to clean up the vast amount of defaulted loans on its balance sheet.

Now, more than a decade on, and as fears grow that hundreds of thousands of firms risk failure because of pressure arising from the pandemic, bad banks could come to the fore again.

Major banks such as Royal Bank owner NatWest Group and Lloyds Banking Group have already set aside billions of pounds to provide for a spike in bad debts linked to coronavirus.

Murdoch MacLennan, banking partner with accountancy firm Azets in Scotland, has warned that increased borrowings, and the deferment of corporation tax, value-added tax, National Insurance, rent and rates will mean that thousands of businesses may be unable to generate enough cash or profit to service their liabilities, ultimately making them unviable.

Mr MacLennan said: “Recent reports that there are over 30,000 businesses in Scotland in distress highlights the scale of the financial crisis shaping up for the economy. We will shortly enter a phase where traditional bank funding will become more difficult to secure and the market to re-bank a business with another mainstream lender will become virtually impossible.

“Lenders will start to turn their attention away from new lending into managing accounts where performance has deteriorated, covenants breached, lending risks have escalated, sector problems have emerged and the potential for failure is high.”

However, Mr MacLennan suggested that, as mainstream banks reduce their lending appetite, an opportunity will arise for alternative and specialist lenders to enter the market.

He said: “We are clearly in exceptional times where banks will start to make moves to protect and manage their own risks, resulting in a marked contraction in available funding. There will be a large community of businesses that in normal times are trading quite comfortably but will soon be starved of cash flow and facing severe contraction or even closure.

“In order to differentiate themselves alternative lenders have a different approach to risk, and they often focus on certain sectors and can be more flexible with their lending solutions and approach, which could be of value to businesses seeking to establish a new borrowing relationship.

“The months ahead are going to be very difficult for many businesses, but it is important that business owners are aware that there are alternative providers in the marketplace that could help them bridge financial problems that otherwise could become terminal.”