Talks to create an industry-wide debt collection service to chase unpaid Covid support loans have stalled, leaving individual UK banks with the prospect of handling an expected wave of fraud and defaults alone.

Under the government’s “bounce back” loan scheme, £45bn has been borrowed by small businesses to help them weather the pandemic.

The first of the 1.47m loans — made by commercial lenders but with a government guarantee — start to pay 2.5 per cent interest from May, a year after the programme opened.

Lobby group UK Finance has been leading discussions on a shared entity — involving specialist debt-collection outsourcers — because the task was expected to be too burdensome to be handled by individual banks.

But several of the UK’s largest lenders such as HSBC and Lloyds have soured on the idea of a centralised “utility”, which has been proposed to oversee the contentious unwinding of the scheme, according to people familiar with the discussions.

The National Audit Office has said taxpayers face losses of up to £26bn because of fraud and bankruptcies in the scheme, through which companies were able to borrow up to £50,000.

Fear of mass defaults has already led the Treasury to extend the repayment window by four years.

Big banks have been disappointed by the scope of the shared utility, which initially they had been keen on to shield them from the “PR disaster” that could result from pursuing small businesses struggling to stay afloat through the courts.

Executives equally do not want to be accused of making insufficient effort to collect on the loans before resorting to the 100 per cent government-guarantee on losses.

“We wanted the utility to do full end-to-end work on the loans . . . [but] now they are proposing the utility just does the basic groundwork, then banks do collections,” one person familiar with the talks told the Financial Times. “I am not on the board any more. We have the capacity to do it in house, so the utility just seems like extra cost and bureaucracy on top.”

“What the utility will actually do is very limited,” another said. “When our own efforts are exhausted, we can go straight to the government for their guarantee.”

Big banks have already hired hundreds of extra debt collection staff and fraud and money laundering specialists to help them manage repayments. However, smaller lenders lack the same capacity to hire and invest in new IT systems, so are still lobbying to share the burden.

A government official said that a full-service utility was “now very unlikely” and that there had been problems co-ordinating the 29 accredited lenders as part of the scheme. Dealing with the torrent of expected fraud and defaults would now most likely fall to individual lenders to sort out themselves.

Another person involved in the scheme said discussions between banks, trade bodies and the treasury continued, but it was more likely that it would result in a basic code of conduct or framework to ensure consistent treatment of customers. “Nothing has been ruled out” yet, the person added.

A spokeswoman for UK Finance declined to comment.

Additional reporting by Nicholas Megaw