UK banks are preparing a code of conduct for pursuing businesses that default on taxpayer-backed coronavirus loans, amid industry estimates that up to eight out of 10 borrowers could fail to repay in full. The Guardian understands that the industry lobby group UK Finance and the state-owned British Business Bank have kicked off talks with commercial lenders in an effort to set industry-wide debt collection standards well ahead of repayments falling due. Loans granted under the coronavirus business interruption loan scheme (CBILS) and bounce-back loan scheme (BBLS) for small and medium-sized businesses have a 12-month repayment-free period, and on the first batch this will run out in the spring of 2021. Discussions about what happens on defaulted loans then are understood to be in the early stages. However, one banking executive said the industry-wide “code of conduct” around collections would likely result in a “lighter-touch approach” than some banks might be used to with run-of-the-mill commercial loans. Each bank usually has its own policy of what to do in the event of a default. “That’s really important so that customers get fair treatment and equal treatment. If they have a bounce-back loan with Barclays or HSBC, it doesn’t feel more heavy-handed in one place or another – it’s agreed,” they said. The BBLS comes with a 100% government guarantee, which means the state will cover a bank’s losses if a customer defaults on their loan. The CBILS, meanwhile, comes with a 80% guarantee, meaning banks will be left to shoulder 20% of potential losses. However, banks are expected to try to recover the full amount before accessing the guarantee. How aggressively they will pursue those debts is at the centre of the discussions. Industry estimates suggest that anywhere between 40% to 80% of businesses could default on their bounce-back loans, the banking executive said. A portion of that will be down to fraudulent applications, which are believed to account for about 10% to 15% of total BBLS, they added. A City taskforce warned last month that £36bn worth of government-backed loans could turn toxic by next year, as companies struggle to repay growing debts during the Covid-19 crisis. Government data released earlier this week showed that banks had approved more than 1m loans worth £42.9bn as of 28 June, including £11bn worth of CBILS and £29.5bn of BBLS. Most BBLS borrowers are small business owners or sole traders that have never taken out a commercial loan. There is currently no deadline to set a debt collections standard, but one high street banking source said the “the decisions need to be in place fairly quickly. Conversations have started, but we need to get to a point where we know what position we’re in.” Bankers are desperate to protect their reputations after scandals such as that which engulfed Royal Bank of Scotland’s Global Restructuring Group (GRG), which was accused of “systemic and widespread” mistreatment of SMEs between 2008 and 2013. “Banks want to make sure that they honour the guarantees offered by the government in the long run, too. They don’t want to do anything that puts that in jeopardy,” the banking executive said. Losing access to government guarantees could leave banks nursing billions of pounds’ worth of losses when companies default. UK Finance and the British Business Bank – which manages the state-guaranteed loan schemes – are holding a series of meetings with different groups of banks, which will continue over the coming weeks, another source with knowledge of the talks confirmed. A British Business Bank spokesperson said: “The British Business Bank has regular meetings with lenders, UK Finance, HM Treasury and others to discuss the operation of the government’s Covid-19 response to loan guarantee schemes. Among other topics discussed is the need to treat customers fairly should collection of debts be required in the future.” UK Finance declined to comment.