The UK government risks creating a legion of zombie companies by prompting banks to lend £ 45bn ($ 62bn) to small businesses with 100% government guarantee during the COVID pandemic, a leading think tank warned, Reuters reported.

The Resolution Foundation said the Bounce Back Loan Scheme, which allows small businesses to borrow the equivalent of three-month sales of up to £ 50,000, has given banks an incentive to support firms with weak long-term prospects. 

“This could slow down the efficient resolution of these firms, and could be of a sufficient scale to have macroeconomic implications,” the think tank said. 

“Allowing firms which are not viable in the long term to continue operating can impede the reallocation of capital and labour from less productive firms to more productive firms.”

The Bank of England has warned that the pandemic will lead to the fact that many companies will have large debts, and they will need restructuring and additional investment from shareholders.

Finance Minister Rishi Sunak initially opposed a 100% government guarantee for low-interest loans to small businesses but changed his approach in April after firms faced credit scrutiny required to obtain emergency funding from banks.