The Government has been “dangerously flat-footed” in its approach to recovering nearly £2 billion in estimated taxpayer losses from the Covid bounce back loan scheme, MPs have warned.

The Public Accounts Committee (PAC) – comprised of cross-party MPs – criticised the lack of incentive for lenders to recover the money.

The bounce back loan scheme was set up in the early days of the Covid-19 lockdowns when businesses across the country were forced to close or faced a drop-off in demand.

It provided loans of up to £50,000 per business, and were available to most UK firms without the usual credit and affordability checks in order to be issued more quickly.

However, the Department for Business and Trade (DBT) estimated that total losses due to fraud on the bounce back loan scheme will be at least £1.9 billion – with the figure likely to be higher as not all fraudulent cases had been identified.

The DBT also said that some £130 million worth of losses had so far been recovered from the bounce back scheme – but said it was not possible to identify how much related to borrowers contracting them fraudulently.

The Government guaranteed to cover any losses incurred by lenders on loans which could not be repaid when the scheme began.

It has nonetheless withdrawn its backing on £367 million worth of loans where it felt lenders have not done all it should have done – meaning banks foot the bill, rather than taxpayers.

Earlier this month, Starling Bank said it had agreed to remove the Government guarantee on a group of loans that had potential issues – leading it to put aside some £28 million.

But the PAC said the broader guarantee meant there was a lack of incentive for banks to recover taxpayers’ money.

Sir Geoffrey Clifton-Brown, chairman of the committee, criticised “passivity” in the Government’s approach.

“DBT were unable to tell us if even the tiny fraction of that sum recovered was in fact even related to fraud,” he said.

“Indeed, relying on government-backed lenders to recover losses, who thus lack any incentive to pursue lost funds, has been a dangerously flat-footed approach.

“Now that the Insolvency Service has taken over responsibility for viable cases, we look forward to hearing how it fares where others have failed.”

A spokesman for the DBT said: “We will always protect taxpayers’ interests, which is why we appointed a Covid counter-fraud commissioner to scrutinise Covid spending and why we will be transferring all ongoing viable cases to the Insolvency Service over the coming months following our review of NATIS’s (National Investigation Service’s) performance.

“We will consider the committee’s recommendations and continue to work across Government, law enforcement and commercial leaders to identify and tackle fraud in relation to the Covid debt schemes.”

The Government expects that transferring cases to the Insolvency Service will speed up the recovery of funds from Covid-era debts.