State to back banks’ risky lending
● The government and the banking sector are looking to establish a “Funding for Lending” scheme in which the government would back the banks to take on riskier lending to help customers survive the Covid-19 crisis.
The scheme — which could be in the form of a government guarantee for the banks — would allow the banks to assist distressed businesses they would not normally be able to lend to, because the government would share some of the losses that might be incurred if these customers default.
This is similar to the schemes governments in other countries such as the UK have put in place to fund the banks to lend to businesses that would otherwise go under as a result of the crisis.
It goes beyond the regulatory measures the Reserve Bank announced last week that freed up the banks’ own balance sheets to enable them to support customers in good standing without facing regulatory penalties.
Kuben Naidoo, the CEO of the Reserve Bank’s Prudential Authority, confirmed that there were discussions under way led by the Treasury on a “Funding for Lending” scheme that would provide for the sharing of risk between the banks and the fiscus.
Though the banking regulator is party to the discussions, it is the government that is leading the talks, in partnership with the banks.
Treasury said yesterday: “Treasury is meeting all the time with various key players and their associations … given the need to ensure we can maintain the productive capacity of the economy and try all in our power to protect businesses from failing due to Covid-19 and to ensure they can continue to pay their employees and suppliers, and to protect the livelihoods of all households in the country.”
Though the Banking Association has made it clear that banks will go out of their way to assist customers in good standing during the lockdown, and the regulator has loosened capital and liquidity requirements to ensure they can do so, bankers have emphasised that they can go only so far to support distressed customers without risking the stability of the banking system. “We have to stay in our lane,” Standard Bank CEO Sim Tshabalala said last week.
There is already anecdotal evidence that tens of thousands of customers have approached the banks to restructure their debts.
The idea of a governmentbacked scheme would be that it would lower the risk for all the banks that customers would be forced into default.
Naidoo moved this week to put pressure on banks to halt bonuses to executives and hold back on paying dividends to shareholders as the crisis unfolds, saying that banks needed to conserve their capital during the crisis so that they could continue to support the economy while ensuring the soundness of the banking sector.
He said on Friday that the Prudential Authority had not instructed the banks to withhold dividends or bonuses but had rather issued “strongly worded advice” in the form of a guidance note.
However, banks with December yearends whose boards had already declared dividends are contractually bound to pay them out to shareholders.
Nedbank said in a Stock Exchange News Service announcement that its interpretation was that dividends already declared should be paid and the payout would go ahead as planned on April 20.
Standard Bank, which initially said it was taking legal advice on the position, is to pay out dividends on April 24 but said it would take the regulatory’s guidance into account for financial 2020.
Absa will pay out dividends as scheduled while First Rand has already done so. Capitec is due to report its February yearend results on Tuesday while Investec has a March year-end.
With dividends for the entire banking sector estimated at R20bn-R30bn for the current year, if all banks were to decline to pay dividends it could free up more than R200bn of potential lending.
In the guidance note, Naidoo wrote: “In the light of the critical role played by banks to continue to provide the necessary funding … to households and businesses amid the Covid-19 pandemic, it is essential that banks conserve their capital resources, among others, to retain their capacity to support the real economy in an environment of heightened uncertainty caused by Covid-19 while complying with the prescribed prudential requirements and ensuring the long-term safety and soundness …”
Tens of thousands reportedly seek debt restructuring