One of Britain’s top bankers has urged the Treasury to rapidly take responsibility for tens of billions of pounds of toxic business loans as lenders seek to free themselves of coronavirus debt.

Lloyds chairman Norman Blackwell, a former policy chief to Margaret Thatcher and John Major, called on the government to set up a vehicle that will take on debts from some companies unable to repay their state-backed coronavirus loans.

If it goes ahead the programme is likely to be compared to the so-called “bad bank” set up by ministers to handle loans in the wake of the financial crisis.

Britain’s high street lenders have doled out vast amounts in emergency funding to prop up small companies during the crisis, supported by a taxpayer guarantee to cover their losses if a borrower fails to pay the money back. 

However, the current rules state that banks must vigorously pursue the debt before turning to Whitehall for what they are owed.

Lord Blackwell suggested that a better solution would be to take debt not likely to be repaid away from banks at a much earlier stage, bringing in either corporate investors or more likely, the Treasury.

He said: “I’m dubious about how much private equity will go into these small companies, so I think the best option is probably some state vehicle that takes those debts off the banks’ balance sheet.”

Bank bosses fear a public backlash when the time comes to collect debts on behalf of the taxpayer, amid concerns Rishi Sunak’s easy-to-access “Bounce Back” loans scheme for small firms had been wrongly seen as a giveaway which will not have to be repaid.

The banking industry has struggled to restore its reputation since the 2008 financial crisis.

Stephen Jones, who runs bank lobby group UK Finance, last month said the concern is that banks “end up being the bad guys again when it turns out [the loans] can’t be repaid” adding that some small businesses wrongly view the state-backed loans as a grant. 

Regulators have been relaxing financial crisis rules to encourage banks to lend this year as the Government relies on lenders to deliver a fire hose of state support to businesses through the crisis. Banks have so far paid out over £31bn to small businesses through three government backed loans schemes. 

The Bank of England has today been sent research by TheCityUK warning that cororonavirus lending could generate  between £32bn and 36bn of toxic debt by March 2021. 

Lord Blackwell said that as it stands bankers will be expected to do “everything they can” to recover toxic covid-19 loans, including putting firms in administration and selling off the assets unless there is an agreed refinancing.

He said the government “has to decide” how it wants to exercise the guarantees it has put on the lifeline loans, which includes the Bounce Back scheme that is 100pc guaranteed by the taxpayer and the Coronavirus Business Interruption Loan Scheme which has a guarantee of 80pc. 

The Conservative peer said: “Some businesses will need to go into liquidation, but those which they think have a prospect [of surviving] the best thing is to take the loans off the banks, pay out their guarantee and put them in a vehicle which will over time try and recoup money from the companies.

“Private finance won’t take on refinancing the debt at the value the government has guaranteed it.” 

He stopped short of calling the government vehicle a ‘bad bank’, typically used to describe a financial institution specialising in dealing with bad debts.

It was reported last month that the government is considering creating a scheme similar to the one set up by Labour to manage the remnants of Northern Rock and Bradford & Bingley after the 2008 crash.