The CSA has urged the Treasury to pay £30 million to fund various engagements with small businesses to see if they can repay their COVID-19 support loan or agree a repayment plan.

The report has called for a policy of frequent correspondence between UK businesses and debt collectors as opposed to minimal contact and then taking non-paying borrowers to court. The trade body has said that this approach could yield an extra £3bn to £6bn.

Banks are in discussions with debt collection agencies about recovering bounce back loans, which are 100% backed by the government. So far, £43.5bn has been extended to 1.4 million small businesses.

The first loan repayments are due from June this year. Using debt collectors is seen by lenders, regulators and the Treasury as sensible given the monumental scale of the task.

If debt collectors were not used, banks would have to hire thousands of staff and create new centres dedicated to recovery of the loans, The Times reports.

Plans are being put together to create a panel of agencies that would undertake the task of seeking repayment, for which they would receive a fee. Any unpaid debts would return to the banks, which would then claim on the government guarantee attached to the loans.

The finance industry has acknowledged the sensitive nature of COVID-19 loan repayments given the financial difficulties faced by many small businesses. Banks must also avoid a repeat of the 2008 financial crisis where the Royal Bank of Scotland used controversial practices in its Global Restructuring Group.

UK banks are considering signing up to a unified approach over the recovery of bounce back loans. They distributed a set pf questions to a group of debt collection firms before Christmas inquiring into what fees they might charge and what a potential protocol might include, for example for the number of phone calls or text messages a borrower might receive.

Chris Leslie, CSA chief executive, said: “When such vast sums of taxpayer money have been lent to business in the expectation it will eventually be repaid, ministers have a responsibility to pursue an effective, as well as a sensitive, approach to recovering that debt.”

The CSA is calling for a fair and consistent approach to collections. Its “engagement scheme”, which it suggests would cost the Treasury £10 million annually for three years, would involve early contact with borrowers and conversations about people’s individual circumstances.

Banks are keen to utilise an agreed approach to debt collection with the Treasury to minimise the risk that in the future, amid a potential public backlash against lenders trying to recoup losses, politicians change the terms of the bounce back loans.

Some industry leaders fear ministers could leave them stuck with the problem, cracking down on efforts to recover loans while making it difficult for banks to claim on the government guarantee.

One question is what happens to loans that are not repaid and are passed to the British Business Bank. They could be written off or new efforts could be made at recovery.