The Covid-19 pandemic is expected to see business lending grow by 14.4% this year – the highest level in 13 years – according to an EY ITEM Club Interim Bank Lending Forecast.

Additional bank finance (including government-backed loans) has been crucial to UK corporates and SMEs during the pandemic, and this latest EY ITEM Club forecast predicts that firms as a whole will only start repaying this additional debt in net terms, and reduce their borrowing, from 2022.

Biggest drop-off in consumer credit demand since records began

Conversely, the lockdown has caused a significant slowdown in bank lending to households. Demand for consumer credit is predicted to fall by 15.9% in 2020 – the biggest annual fall since records began in 1993.

Mortgage lending is forecast to rise, but only marginally, by just 2.6% in 2020. This would be the weakest growth since 2015, with further slow growth expected over the next two years as unemployment rises.

In contrast to the 2008 financial crisis, Covid-19 has seen bank lending to the corporate sector accelerate with many businesses seeking loans to help cover their costs as revenues stalled.

Banks lent (net of repayments) non-financial companies just over £30bn in March – around 100 times the average of net lending over the twelve months to February.

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Coronavirus loan schemes help boost bank lending

Aided by government-backed loan schemes, lending has continued at historically high levels resulting in annual growth rising from 0.6% in February to 11.1% in May.

The business lending growth forecast of 14.4% this year compares to 2% in 2019 and an average of -1.4% from 2010 to 2019.

As the Government’s furlough support tapers off, business costs will rise and businesses are likely to be more constrained in taking on additional debt. Lending growth is forecast to slow to 7.1% in 2021.

Firms as a whole are forecast to only start repaying debt in net terms, and reduce their borrowing, from 2022, reflecting the EY ITEM Club’s expectation that the economy’s return to normality will be relatively slow-paced.