Treasury starts to wind down loan scheme
As it prepares to shut down the state-backed bank credit scheme, the Treasury has extended by three months what was supposed to be the centrepiece of President Cyril Ramaphosa’s Covid-19 relief strategy to clear out applications already in the system.
Ramaphosa launched a R500bn package to cushion the blows on the economy after his government imposed one of the world’s harshest lockdowns, which brought entire industries to a halt.
At the heart of the programme was the R200bn loan guarantee scheme, which was meant to dole out loans to small businesses as they have limited cash buffers and little to no access to capital markets.
But the scheme has failed to live up to expectations, paying out less than 10% of the total, even after several tweaks on the qualifying criteria, including removing a cap on turnover and allowing sole proprietorships to apply, and making credit vetting more discretionary.
Since inception until the end
of March, banks from Standard Bank and Nedbank to Absa and FirstRand had disbursed R18bn via 14,827 loan agreements under the scheme, said the Banking Association SA (Basa) in a statement on Monday.
However, the scheme came into effect in May 2020, a few weeks after banks had begun extending payment relief to millions of clients under a programme agreed to by the sector, possibly making it difficult for small businesses to take on additional debt.
According to Basa, the industry has advanced nearly R34bn via relief measures, such as payment holidays to individuals and small businesses, as of October 2020.
WEAK DEMAND
The industry body group expects demand for loans under the state-backed credit lines to remain weak.
“Demand for loans from the scheme is expected to decrease further in the coming months,” Basa said, adding that small businesses prefer equity funding rather than credit that they struggle to repay.
“Many of the financial and business challenges facing small enterprises pre-date the Covid-19 pandemic and were caused by a weak economy and uncertain business conditions.”
Banks have only approved 511 loans in 2021, of which only 97 were taken up by clients. Based on an average loan size of
R1.5m as disclosed last year, the programme this year may have only extended R150m to qualifying businesses.
Under the plan designed by the Treasury, the Reserve Bank and Basa, loans are processed by commercial banks, which take the first 6% of losses if debtors are unable to pay.
While the Treasury agreed to cover any additional losses beyond those carried by the commercial banks, it required that all loans be extended using normal credit criteria.
Loans were extended for five years at the prime lending rate, meaning that banks could not price the credit or structure the duration of the loan according to risk appetite or clients’ requirements.
Basa and the Treasury have defended the scheme, pointing to suppressed credit appetite by businesses in a highly uncertain and weak economic environment, and the extensive restructuring and relief provided by banks to clients at the beginning of the lockdown, before the scheme came into effect.
MANY OF THE FINANCIAL AND BUSINESS CHALLENGES FACING SMALL ENTERPRISES PRE-DATE THE COVID-19 PANDEMIC