Covid loan scheme needs expansion

The state’s R200bn Covid-19 loan guarantee scheme needs to be extended to non-bank funders of small and medium enterprises (SMEs) or risk perpetuating inequality in SA’s financial system and wider economy. This is according to Polo Leteka, founder and executive director of IDF Capital, a private equity firm that specialises in investing in SMEs across SA and other parts of Africa.

The state’s R200bn Covid-19 loan guarantee scheme needs to be extended to nonbank funders of small and medium enterprises (SMEs) or risk perpetuating inequality in SA’s financial system and wider economy.

This is according Polo Leteka, founder and executive director of IDF Capital, a private equity firm that specialises in investing in SMEs across SA and other parts of Africa.

The country’s traditional banking sector has not been successful in reaching most SMEs, many of which do not typically meet the funding criteria set by banks, Leteka said.

The scheme in its current form will only aggravate this “market failure” if it remains confined to “those SMEs that are lucky enough to meet the needs of those banking institutions”.

It is with this problem in mind that the Black Business

Council met the National Treasury and deputy minister of finance David Masondo last week, to find ways to make the loan scheme — launched on May 12 — more inclusive.

The scheme forms part of the country’s economic stimulus package aimed at assisting companies with turnover of R300m or less a year, and weather the storm of the pandemic and the restrictive lockdown.

To access a loan — guaranteed by the government with the money provided by the Reserve Bank — a business must apply through its existing bank, and be a client in “good standing”.

The Black Business Council and the Treasury agreed to explore ways to include nonbank SME funders to help prevent small enterprises that may not necessarily meet the banks’ funding criteria being excluded from relief funds.

It was also agreed that the Black Business Council, the Treasury and the Banking Association SA (Basa) would discuss further proposals, including the possible expansion of the scheme to new bank clients, according to a statement.

Kganki Matabane, CEO of the Black Business Council, said a problem faced by small businesses is the failure of big business and the government to pay SMEs on time, resulting in them being blacklisted by the banks.

The government’s loan scheme is intended to aid the very same businesses it fails to pay, which means they lose their “good standing” status with the banks and cannot qualify for the support.

“It’s like a vicious circle,” said Matabane. “We realised we need to do something to try to assist these companies to at least qualify.”

The exact extent of the problem is not clear. But a series of questions the DA put to the government in parliament last year showed that national departments and provinces owe service providers R7.1bn

SLOW UPTAKE

The scheme’s uptake has however been slow, according to Kuben Naidoo, a deputy governor of the Reserve Bank, which administers the scheme.

Speaking at a recent webinar, Naidoo said that so far only R2bn to R3bn has been taken up by each of the big four banks, with smaller ones taking up slightly less. But Naidoo said he expects the scheme will be used more “if the crisis is long and deep”.

Leteka said that the qualifying criteria of banks has always been prohibitive but this does not mean non-bank funders, such as IDF Capital, undertake reckless lending.

“Our criteria is not dissimilar to banks, but our approach to risk mitigation is not the same,” she said. “We have found ways of de-risking them and found ways to support them through the provisions of capital and other non-financial support to help them grow and create jobs.”

Money provided through the loan guarantee scheme must be used for operational expenditure, such as salaries, rent, and utilities, and to cover supplier payments.

According to Leteka, though, the scheme should not be prescriptive about how the funds are used. “After Covid-19 there is no guarantee that we will automatically recover,” she said.

Many businesses may need to make investments that allow them to pivot or adjust their business models to ensure |they survive beyond the coronavirus crisis.

“In some instances we are going to be starting businesses from scratch; in some instances we are going to have to pivot some of the business models, so you can’t have a blunt approach,” she said.

Matabane said the Black Business Council would like to see the scheme extended to include provincial development finance institutions and smaller banks.

The Treasury did not respond to a request for comment, but Matabane said the parties are set to meet again in two weeks for feedback on the proposals.

THE BLACK BUSINESS COUNCIL HAS MET THE TREASURY TO FIND WAYS TO MAKE THE LOAN SCHEME MORE INCLUSIVE

DEPUTY GOVERNOR OF THE RESERVE BANK EXPECTS THE SCHEME WILL BE USED MORE ‘IF THE CRISIS IS LONG AND DEEP’