The Treasury is pushing for the bounce back loan repayment period for smaller businesses to be doubled from five years to 10 years.
Both Government and banks that have jointly lent £33bn to SMEs through the bounce back scheme are afraid of the looming wave of nonrepayment.
More than a million small companies have borrowed under the bounce back scheme, which offers loans of up to £50,000 and are covered by a 100-per-cent state guarantee.
The loans were launched in May after an outcry about the criteria attached to the coronavirus business interruption loans, which made it difficult for small businesses to qualify.
However, the Office for Budget Responsibility estimates that £53bn will eventually be handed to small firms in bounce back loans, with 40 per cent likely to default. This equates to costing the taxpayer £16bn in bad loans.
Nearly half of small businesses that have taken out government emergency coronavirus loans do not intend to repay them. Forty-three per cent of businesses that have taken out either bounce back loans or coronavirus business interruption loans said they do not believe the Government will chase the debt, or that they will be unable to repay the loan, according to the Business Banking Resolution Service.