Assessing the Covid-19 Loan Guarantee Scheme

IN JULY, the Covid-19 Loan Guarantee Scheme, which was supposed to provide financial relief to businesses, came to an end. But how successful was it?

In a recent parliamentary response to questions session, President Cyril Ramaphosa said the scheme had been disappointing.

The scheme was intended to provide loans, substantially guaranteed by the government, to eligible businesses that were in good standing with their banks at the end of December 2019, registered with SA Revenue Service and financially distressed as a result of the Covid-19 outbreak and subsequent lockdowns.

Funds borrowed from this scheme, through the banking industry, could be used for operational expenses, such as salaries, rent and lease agreements and contracts with suppliers. The loans were granted at a preferential rate (prime) and repayment could be deferred for a maximum of one year after taking out the loan. Businesses would then be required to repay the loan over five years.

Banks were not permitted to profit from these loans and any surpluses generated would accrue to the National Treasury. The government and commercial banks shared the risk of non-repayment of these loans. The National Treasury initially provided R100 billion to the banking industry through the South African Reserve

Bank, with the option to extend the scheme to R200bn if required.

The Banking Association South Africa (Basa) has said the scheme succeeded in helping business enterprises that qualified to stay operational and saved jobs.

As at June 25, participating banks had extended 13324 loans worth more than R18bn to qualifying applicants. At the time, the scheme had received 50 717 applications for loans, of which just 26% , or 13 324, were approved by banks and taken up by the applicants.

Basa said many of the financial and business challenges facing small enterprises pre-dated the pandemic and were caused, among others, by a weak economy, load shedding and uncertain business conditions. Many business owners were reluctant to take on more debt in a weak and uncertain business environment, thereby reducing the demand for the scheme.

“The Covid-19 Loan Guarantee Scheme was only a small part of the relief that banks offered their clients and customers who are in financial distress. Figures reported to the South African Reserve Bank indicate that, as of February 2021, banks had provided R293bn in financial relief to their customers and clients – corporate: R165bn, retail: R128bn – which accounted for 5.8% of the total corporate and retail credit exposure,” Basa said.

It said it had called for the reduction of red tape and policy uncertainty to make it easier to do business, especially for small and medium enterprises. Facilitating entrepreneurship and small business development were among the surest and fastest ways to boost inclusive economic growth and job creation.

Small Business Institute (SBI) chief executive John Dludlu said the scheme had played its role and the country had learnt what was possible and not possible to achieve.

“The priority now is on continuing to support SMMEs in light of the continuation of the lockdown as some businesses were not yet operating optimally,” said Dludlu.

The immediate focus was on SMMEs that had been devastated by the looting that took place in July in KwaZulu-Natal and Gauteng.