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By Sinead Cruise and Iain Withers

LONDON (Reuters) - The UK government has scrapped guarantees on nearly 1 billion pounds ($1.2 billion) of bank loans handed out to ailing businesses during the COVID-19 pandemic, leaving lenders on the hook for some of the borrowings that will not be repaid.

Previously unreported figures obtained by Reuters under a Freedom of Information (FOI) request show that the state-owned British Business Bank (BBB) - which administers the loan schemes - has removed state guarantees from 10,786 loans worth a combined 979 million pounds as of Oct. 11, shielding taxpayers from some losses.

While the amount is only a fraction so far of the 77 billion pounds of loans issued, the move follows pressure from lawmakers and Britain's public spending watchdog who criticised the programmes for being too lax. The figures could rise further - latest figures show just 17 billion pounds have been fully repaid by borrowers as of June 30.

Dozens of lenders took part in the government-backed schemes, including Britain's "Big Four" banks: Barclays, NatWest, Lloyds (LON:LLOY) and HSBC. Barclays and HSBC declined to comment, while the other two were not immediately available.

Britain's emergency lending schemes echoed government finance initiatives deployed worldwide to prop up companies during lengthy lockdowns, but the full costs and who will ultimately foot the various bills is only now becoming clearer.

Public officials have ratcheted up their scrutiny of the schemes to try to ensure better value for money, three sources familiar with the matter told Reuters, just as ministers review strained state finances ahead of a key budget update later this month.

"In unprecedented times, we stepped up to support the country," a spokesperson for the UK's business department said of the loan schemes, adding that where necessary it was working with lenders to remove guarantees to protect taxpayer money.

Bank lobby group UK Finance said lenders were in regular discussions with the BBB, with some removing loans from the guarantee at their own discretion.

Lenders who answered government calls to keep credit flowing to Britain's shell-shocked economy from 2020 did so via three main schemes. The largest and most controversial, the "Bounce Back Loan" (BBL) scheme, delivered 47 billion pounds and was specially designed to help Britain's smallest firms stay afloat.

Participants were requested to streamline their typical credit checks in order to lend up to 50,000 pounds within hours of an application. Under BBL terms, the government assumed 100% of the credit risk.

However, some lenders are finding they cannot claim on that guarantee, the FOI response shows. Following the removal, any financial loss is borne in full by the lender, BBB said.

The guarantees have been removed for a variety of reasons, the BBB said, including due to data corrections, application errors resulting in "duplicate" funds being sent to companies, as well as infringements of scheme rules.

Potential infringements could include evidence of poor treatment of borrowers, one of the sources said. The BBB has the power to offset a proportion of a lender's future claims for repeat infringements, but had not yet done so, the source added.

Mistakes had been identified voluntarily by the lenders themselves, or following discussions with the BBB, according to the FOI response.

All the lenders that participated in the emergency loan schemes have been subject to at least one audit, the BBB said.

'PREJUDICE COMMERCIAL INTERESTS'

Reuters requested a breakdown of state guarantee removals by lender, but this was rejected by the BBB on the grounds this could be "prejudicial to their commercial interests." Lender views were canvassed on potential disclosure and they agreed on this, the BBB said.

The lending schemes have been mired in controversy, as evidence mounts of widespread fraud. A junior government minister, Theodore Agnew, resigned last year in protest, saying efforts to stop fraudulent abuse were "woeful."

The latest overall scheme data, published in September, showed the value of suspected fraud across all the schemes had hit 1.7 billion pounds as of June 30, up 43% on the previous estimate in March.

The figures also showed the government had paid out 7.4 billion pounds to lenders under the state guarantees.

"Lenders are doing all they can to ensure loans are repaid as well as taking action to tackle fraud," a UK Finance spokesperson said.

Suspected fraud is not necessarily a reason for removing a guarantee, provided the lender is otherwise compliant with scheme rules, another source said.

A second source, who assisted in the design of the scheme and declined to be named, said it should not come as a surprise that loans that banks would ordinarily not consider were hitting problems, adding that lenders voiced reservations at the time.

The BBB had also raised concerns prior to the launch of the BBL scheme. In a letter to the government in May 2020, the BBB warned the scheme was "vulnerable to abuse by individuals and by participants in organized crime."

In a response that month, the government said it had assessed the risks but decided to proceed with its launch, citing "the unprecedented situation facing the country."

($1 = 0.8235 pound)

Exclusive-UK rips up state guarantees on nearly 1 billion pounds of COVID loans