Taxpayers stand to lose up to £26bn on the government’s most popular Covid-19 business loan scheme because of fraud or an inability to repay the money, Whitehall’s spending watchdog has warned. The concerns were raised in a National Audit Office (NAO) report into the 100% government-backed bounce-back loan scheme (BBLS), which was designed to quickly distribute cheap loans of up to £50,000 to small businesses hit by the Covid-19 crisis. The watchdog has warned that up to 60% of customers may fail to pay back the loans because of minimal credit checks and fraudulent applications. In the latest available figures from the Treasury, a total of £38bn has been borrowed under the scheme by 1.3 million firms. Assuming lending through the scheme totals £43bn by the time it closes at the end of November, taxpayers could end up footing a bill of between £15bn and £26bn to cover bad debts, the NAO warned. Labour MP Meg Hillier, who chairs the public accounts committee, said: “The scheme’s hasty launch means criminals may have helped themselves to billions of pounds at the taxpayer’s expense. Sadly, many firms won’t be able to repay their loans and the banks will be quick to wash their hands of the problem. “The government estimates that up to 60% of the loans could turn bad – this would be a truly eye-watering loss of public money.” The NAO is now calling on the government to take action to try to avoid losing so much public money. Head of the NAO Gareth Davies said: “Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse. It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.” The report comes just weeks after the government extended the application deadline for Covid loans including BBLS by two months to the end of November, as it tries to avoid further fallout from the coronavirus crisis. The spending watchdog conceded that the BBLS programme “succeeded in quickly supporting small businesses” since May, but the speedy application process – which scrapped credit checks and relied on self-reporting from customers – has come at a cost. The NAO said the lack of affordability checks means that hundreds of thousands of customers will struggle to repay their debts, triggering the government guarantee that sees taxpayer money used to cover banks’ losses. Meanwhile, the decision to provide funds quickly left public money exposed to fraud – the scale of which the NAO said would not be clear for months. However, the Cabinet Office’s government fraud function estimates that losses will be significantly above the usual levels of fraud linked to public sector schemes, which usually range between 0.5% and 5%. Together, the fraud and affordability risks mean that between 35% to 60% of firms that had borrowed may default on the loans, the NAO said. However, the NAO warned that these estimates were “highly uncertain” and the full extent of the losses would only become clear once loans start being repaid in May 2021. Police have already made multiple arrests linked to the BBLS. In one case, two men in London claimed more than £500,000 from the emergency loan programme by recruiting multiple people to set up fake companies and bank accounts to launder the cash. Davies warned ministers weeks ago that there would be “no excuse” if billions of pounds worth of fraud within government schemes continues under a second coronavirus lockdown. Davies told the Guardian that there had already been “significant” abuse of the furlough scheme and the BBLS, which would take months to identify. The National Crime Agency and state-owned British Business Bank – which oversees the Covid loan schemes – have also warned about fraud linked to bounce back loans. A government spokesperson defended the Covid loan schemes, saying they had provided a lifeline to thousands of UK businesses. “We targeted this support to help those who need it most as quickly as possible and we won’t apologise for this. “We’ve looked to minimise fraud – with lenders implementing a range of protections including anti-money laundering and customer checks, as well as transaction monitoring controls. Any fraudulent applications can be criminally prosecuted for which penalties include imprisonment or a fine or both.”