OakNorth Bank, the lender to growth small and medium-sized enterprises (SMEs) in the UK, is ready to begin lending through the Coronavirus Business Interruption Loan Scheme (CBILS), launched to help businesses manage during the Covid-19 crisis, with the country under a lockdown that has been extended into May.
Government-backed British Business Bank has signed off on OakNorth Bank’s participation in the scheme and the challenger bank has been allocated £50 million to begin supporting existing clients straight away. This sum could also be extended to new customers in the coming weeks and the bank could seek additional capital through CBILS once the initial sum has been lent.
OakNorth Bank was accredited as a CBILS lender earlier this month, along with Starling Bank, Co-operative Bank and Cynergy Bank, while 40+ lenders transitioned over from the Enterprise Finance Guarantee (EFG) scheme.
Nick Lee, head of regulatory affairs at OakNorth Bank, says: “British Business Bank processed our application incredibly quickly, given the current circumstances. Every organisation involved in this process, from the government to British Business Bank, to us as the applicant lender, is working under the same operational constraints of the lockdown.”
CBILS provides loans of up to £5 million, available on repayment terms of up to six years. Interest and fees will be paid by the UK government for the first 12 months, and the state is also acting as guarantor for 80% of any loan.
OakNorth Bank called for changes to CBILS following its launch, to ensure the scheme does not overburden SMEs with debt. The challenger bank also believes that it is not accessible or simple enough to use.
Lee says: “We have raised the points that CBILS is a lending scheme, first and foremost, and is built on some complex terms and conditions, all of which makes lending through it more challenging and time consuming. As a result, we asked whether the government guarantee could be increased beyond 80% and pointed out that not every business needs more debt right now. Having made those points, we do think the scheme is a good one and absolutely necessary, but it has just taken some time to get it up and running.”
Lee says that OakNorth Bank’s tried and tested technology-driven approach to growth SME lending will underpin its participation in CBILS, to ensure that money is distributed responsibly to only those that need it.
“Although the government is providing a notional 80% guarantee, we and our counterparties still have to go through the proper credit process to make a decision as to whether to lend, as we would do normally.”
“Growth SME lending requires a fairly regimented credit process. OakNorth Bank has a more technology-driven approach to credit analytics and monitoring than many other lenders in the SME space, so we are able to turnaround loans applications pretty quickly. This will be the same with CBILS.”
Indeed, OakNorth Bank has reduced its loan processing time to 21 days, a much quicker turnaround for applications than many of its competitors.
Lee says: “We believe that some incumbent lenders have been too slow to turn around lending decisions for SMEs in the past. The unique selling point of OakNorth Bank is that we go through a rigorous analysis of credit applications and our technology makes that much more robust than some of our competitors. This leads to better lending decisions and for the bank, lower credit events. We’re also able to reach better credit decisions more quickly than some other banks.”
While OakNorth Bank was waiting for CBILS accreditation, the challenger bank analysed its existing borrowers and subjected them to stress tests, to understand who would need support and why. “So we knew who we would be working with through CBILS and who we would need to prioritise, before getting on to the scheme.”
Lee continues: “We have contacted every borrower and gone through this with them. We began the process when we were all going into lockdown, so that we could learn what the best practices were in the sectors where our SME customers work and share them. Then we moved on to CBILS and focused on understanding their borrowing needs.”
“Going forward, the challenges for everyone will be in not knowing how long the lockdown will last or how the exit strategy will work. We have stress-tested our whole book and we continue to do that as more information comes out, so we have an ongoing understanding of where our borrowers are and what they might need in terms of CBILS or other products.”
The global impact of the pandemic means that schemes similar to CBILS are in operation or being launched in many countries around the world. OakNorth Bank uses its own platform for growth SME lending in the UK, but it has also long licensed its technology to banks and lenders in other jurisdictions. The introduction of CBILS-like schemes has required many financial services institutions to work quickly to install the necessary infrastructure to serve their own clients.
One such institution is New York City-headquartered Modern Bank, which is supplying businesses of fewer than 500 employees with loans up to $10 million to cover costs such as payroll, rent and utilities under the recently launched US Paycheck Protection Program under the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed at the end of March.
To ensure Modern Bank is able to efficiently manage significant demand, OakNorth has provided its specially designed online workflow for banks participating in the Paycheck Protection Program, to help with document collection and end-to-end process streamlining. OakNorth has also provided Modern Bank with additional operational capacity through pre-screening of applications. Together, these streamline key decision making and risk management processes, such as loan eligibility, authentication criteria and checks, compliance reviews, credit decisions, and forgiveness eligibility and approval.
Lee says: “We already had a number of partnerships in place prior to Covid-19, where we help banks across the world with their SME credit underwriting. Following the outbreak, we came up with a Covid-19 risk rating score, which has so far been used on about $30 billion of assets.”
“I’m talking daily with banks about how we can help them in this space. As far as I can see, there is no other platform that offers this kind of service anywhere in the world.”
He adds: “I’m sure that, as we emerge from this crisis, we will learn what went well and what did not, and there could be a big push for more digitisation of the banking sector. I believe we will have a big role to play in helping others along that journey.”