£36bn in Covid-19 emergency loans to small businesses are at risk of turning toxic and may hamper efforts for an economic recovery in the UK, a report by TheCityUK has revealed, according to a report in the Sunday Times.

The report, warns of the “unsustainable” debts that will weigh down on SMEs through three government-backed initiatives: the bounce back loan scheme (BBLS); the coronavirus business interruption loan scheme (CBILS); and the CBILS scheme for larger businesses (CLBILS).

The report foresees an explosion in lending through CBILS, from £27bn currently, to £123bn by the second quarter of next year. The report estimates that up to £36bn of that lending will be “unsustainable” and could rise to £107bn of corporate loans by next March, which includes debt taken on before the crisis.

TheCityUK report is by the Recapitalisation Group and is overseen by Sir Adrian Montague of Aviva, the UK insurance and pension provider.

The Avia report looks to provide solutions to the debt burden through the private sector which include “exchanging troubled CBILS for preference shares or swapping BBLS for contingent tax instruments, which might operate in a similar way to student loans and be repaid only when certain payment thresholds are reached,” the Sunday Times report said.