A City taskforce is warning that up to £36bn worth of government-backed business loans could turn toxic by next year, as companies struggle to repay growing debts during the Covid-19 crisis. An interim report by the Recapitalisation Group, led by EY and lobby group TheCityUK, projects that businesses will be saddled with £97bn-£107bn worth of unsustainable debt by March 2021. A third of that total will come from government-backed loans. It outlines a range of measures meant to support businesses and avoid using taxpayer money to cover unpaid debts if firms default on their loans. Those ideas, which have been put to the Bank of England and the Treasury, include turning debt into equity or a profit tax, and introducing debt repayment holidays. There are hopes that private investors, including pensions funds, could take part. A final version of the report, which has now been released for consultation, is expected by July. The toxic debt warning comes as banks are burdening some larger businesses with thousands of pounds in legal fees as the companies try to access emergency state-guaranteed loans during the pandemic. The Guardian has confirmed that the majority of the seven banks involved in the coronavirus large business interruption loan scheme (CLBILS) – including Lloyds, Royal Bank of Scotland, Santander, HSBC and Barclays – are asking applicants to cover the costs of hiring external lawyers to draw up documents or provide a legal opinion on contracts for larger or complex loans. It has heaped extra charges on to businesses trying to weather a cash squeeze during the pandemic. In one case reviewed by the Guardian, Lloyds initially asked a customer to pay more than £7,500 worth of legal fees to access a £250,000 loan, effectively doubling the customer’s interest rate from 2.2% to more than 5%. Lloyds confirmed that the charge was eventually scrapped after the customer complained. A spokeswoman for the British Business Bank – which administers the scheme on behalf of the government – told the Guardian that it was not aware that additional legal costs were being charged to CLBILS customers. “There is no requirement within the CLBILS guarantee agreement for a solicitor to draw up the documentation and provide a legal opinion as part of the application or administration process,” she said. She added that the BBB “will keep monitoring the situation” to see whether it affects demand for the loans. CLBILS have attracted far fewer applicants than other government-backed schemes, with only 191 worth £1.1bn distributed so far. That compares with the £21bn worth of 100% government-backed bounce-back loans (BBLS) issued to 699,354 small businesses to date. It is also lower than the near £9bn issued to 45,843 small and medium sized firms through the 80% government-backed coronavirus business interruption loan scheme (CBILS). The Bank of England has, meanwhile, provided £16.2bn worth of funding to 53 big companies through the the Covid corporate financing facility. CLBILS – which offer loans of up to £200m to large firms – are already far less generous than the schemes designed for smaller UK companies, such as CBILS and bounce-back loans, which come with no arrangement fees and are interest-free for 12 months. Banks are charged a fee to access the 80% government guarantee for each CLBIL loan, which they are allowed to pass on to customers. That fee is usually worth up to 100 basis points, or 1%, of the loan. CLBILS applicants are also barred from paying dividends, participating in share buybacks, and cannot pay cash bonuses to executives. Commenting on the additional legal charges, Kevin Hollinrake, Conservative MP and co-chair of the all-party parliamentary group on fair business banking, said: “We cannot expect the banks to carry costs that they incur to lend this money. Having said that, we have seen occasions where banks exploited those opportunities in the past with all kinds of charges that were inappropriate.” Banks faced a backlash early on in the Covid-19 crisis when a number of lenders demanded personal guarantees from businesses hoping to access CBILS. Banks originally defended the practice, saying it was part of normal lending criteria, but within weeks the Treasury introduced a full ban on personal guarantees for smaller loans. Lenders told the Guardian it was normal practice to involve external lawyers for larger or complex loans like those that may be offered through CLBILS, and that the banks would not usually cover the costs. Lloyds said: “A legal contract is required when undertaking any contract arrangement of this nature. This is standard practice for responsible commercial lenders and borrowers, and we are transparent that legal costs are to be borne by the borrower on the initial eligibility form a client fills in when applying for a CLBIL.” The BBB said that it may be appropriate to use solicitors in some cases, but reiterated that it was not required by the CLBIL scheme.