The taxpayer faces losses of up to 26bn because of fraud and company defaults on the governments coronavirus loan scheme for small businesses, according to a report by parliaments spending watchdog that revealed loopholes have already been exploited by criminals.

The national audit office on wednesday said the government prioritised the need for rapid payments to companies through its bounce back loan scheme, and has been prepared to tolerate a potentially very high level of losses as a result.

More than 38bn worth of bounce back loans have so far been issued by banks, which carry 100 per cent state guarantees.

The scheme is a key plank of the governments efforts to help companies through the coronavirus crisis, and has provided loans each worth up to 50,000 to about 1.1m businesses.

But banks were told by the government to carry out only light checks on borrowers to enable them to lend quickly.

Meg hillier, chair of the house of commons public accounts committee, said the bounce back loan scheme's hasty launch may have helped criminals take billions at the taxpayers expense.

She added that the scheme could become an eye-watering loss of public money given estimates that up to 60 per cent of the loans could turn bad.

Sadly, many firms wont be able to repay their loans and the banks will be quick to wash their hands of the problem, ms hillier said.

The annual report by the department for business, energy and industrial strategy last week said likely total credit and fraud losses on the bounce back loan scheme would be between 35 per cent and 60 per cent of the value of the money lent.

Assuming the scheme lends 43bn, this would imply a potential cost to government of 15bn to 26bn, said the nao.

The nao report also revealed that thevetting systems for bounce back loan applications were not in place in may when the scheme launched, which meant that fraudsters were able to lodge duplicate claims for borrowings for a month.

It said that these fraudulent claims could account for 2.3 per cent of approved applications in may, when about 18bn was lent by banks, according to government figures.

The nao said that the bounce back loan scheme carried a much higher fraud risk than typical for the public sector.

The cabinet office... believes fraud losses are likely to be significantly above the general estimates of public sector fraud levels of 0.5 per to 5 cent, it added.

The nao report revealed some of the costs of running the scheme, with about 1bn so far expected to be needed from the government to pay borrowers interest costs during the first year of their loans with banks. borrowers only start paying interest in the second year.

The governments three main state-backed loan schemes for companies in the coronavirus crisis could also cost about 75m in administrative expenses, said the nao.

It said the bounce back loan scheme had achieved its initial objective of quickly supporting small businesses, but much hard work remains including a debt collection plan with lenders and fraud investigation arrangements.

The british business bank, the state-owned entity which administers the scheme, will provide a monthly fraud report from this month.

The bbb said that it was committed to ensuring that the risks to value for money were minimised, liaising closely with government, lenders and other stakeholders.

The nao said the treasury had not yet finalised how lenders should collect overdue loan repayments, but the principles of a recovery process have been agreed with banks.

The financial times reported in july that the government and lenders were in talks to create a standardised approach, and this could include the creation of a body that would oversee the collection of loans.

The nao found that some lenders have been slow to approve bounce back loan applications, notably for new business customers.

It said most banks approved loans for existing business customers within 24 to 72 hours of applications being made but approval times for new customers take substantially longer.

The nao highlighted feedback from two large lenders that applications from new customers may take between four and 12 weeks to process.

The business department said: weve looked to minimise fraud, with lenders implementing a range of protections including anti-money laundering and customer checks, as well as transaction monitoring controls.

Any fraudulent applications can be criminally prosecutedfor which penalties include imprisonment or a fine or both.