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‘Significant increase’ in Covid-19 credit guarantee scheme loans by R200 billion

There has been an improvement in uptake of the Covid-19 credit guarantee program for small businesses whose operations have been adversely affected by the virus and the lockdown – with efforts underway to change some of the eligibility criteria in order to further increase demand.

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The program was launched in May. South African Reserve Bank (Sarb) deputy governor Kuben Naidoo said two weeks ago that the program’s initial uptake was quite low. He has now told Moneyweb that he has “grown considerably over the past week”.

He will not provide any details on how much more has been released from the reported R 2-3 billion that he says has been disbursed by each participating bank since the program began.

The South African Banking Association would not comment on the numbers until its update on Covid-19 debt relief.

The program is an initiative to provide up to R200 billion in largely government guaranteed loans to small businesses with turnover below R300 million for operational expenses such as salaries, rent and utilities. The first phase was launched with an initial amount of R100 billion made available to the market. This will be recharged according to demand.

Teething problems

Currently, the six participating banks through which loans are available are Absa, Mercantile Bank, First National Bank, Investec, Nedbank and Standard Bank.

“The Treasury and the banks are working on revisions to the program to try to further broaden the scope of the program to further encourage adoption,” Naidoo said, adding that any changes to the program will likely be announced when the Minister of Finances Tito Mboweni tables his supplementary budget.

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The Black Business Council is one of the institutions that has met with the Treasury to discuss amendments to the regime, due to criteria that are not inclusive enough. One of the main proposals is the introduction of non-bank SME lenders who would be able to help businesses that do not meet the criteria for commercial bank financing.

Banks are expected to apply their normal risk assessment and credit application processes when granting loans, and may also require borrowers to post a bond as well as other additional conditions as they deem appropriate.

Delayed departure

Stuart Theobald, President of Capital Markets and Financial Services Research House Intellidex, says tThe program came too late: almost two months after the lockdown, when some businesses were closed or found alternative financing.

The current regime was influenced by Intellidex’s proposal for a bank guarantee scheme.

Theobald said the program also comes with onerous conditions and risks for entrepreneurs and these will need to be removed to encourage greater adoption.

Few people are going to put their homes in jeopardy when the outlook is so uncertain, ”he said, commenting on the condition for applicants to provide personal surety to secure their loans.

In addition, entrepreneurs are only allowed to use the loans for overhead costs and cannot use the money to pay dividends or repay loans to shareholders, “which disrupts people’s financial planning, especially they are financing the business with loans so far “.

Delicate balance

“I think the government has to decide what it wants,” Theobald said.

“If he wants R200 billion stimulus in the economy, he has to change the program to get it out. If he just wants to keep businesses from shutting down, he can adjust less – but still needs [to] twist.”

The condition of providing sSecurity is one of the issues being considered for possible review, so that it doesn’t deter businesses that need loans, Naidoo said.

He added, however, that the condition is applied on a discretionary basis by individual banks and, based on comments Sarb has received from banks, “this is not a major obstacle to obtaining the loan.”

“The design of a guarantee scheme is a delicate balance between getting banks to lend more than they normally do, but you don’t want them to take excessive credit risk for their own balance sheet or that of the Treasury. national.”

How much is too much?

The risks on the loans are shared between the banks and the Treasury, where the banks are expected to bear 6% of the losses while the rest is covered by the government. But any loss will first be offset by the net margins generated by each bank’s loan portfolio of around 2%, followed by a 0.5% guarantee fee charged by the Treasury.

Theobald said the banks have maintained existing credit risk processes, which in effect means that “the collateral was not used to increase the appetite for bank risk”.

He said the government must establish an explicit budget for the risk that it is willing to accept bad debts.

“The way the public accounts are compiled, with the first phase of R100 billion considered a contingent liability, the budget for losses is currently zero.

“Our point of view in our proposal was that these loans should be prepared for a default rate of 20%. This implies 40 billion rand losses on the entire 200 billion rand regime, ”Theobald said.

Naidoo stressed that the program needs to be seen in context. South Africa has never had a loan guarantee program where the government and banks work together to provide loans to the public. Added to this was the little time available to develop and implement it.

“It has been in place for about a month. We are learning lessons every day and we will make adjustments to the program to ensure its effectiveness and utility, ”he said.

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