Banks launch SME aid scheme
But the state-backed loans won’t be right for everyone, they say
● The launch of the credit guarantee scheme this week has given banks another form of relief they can offer small and medium enterprises (SMEs) to help them survive the lockdown — but they caution it may not be the solution for all customers.
The scheme, which was finalised on Tuesday, is a partnership between the banks, the Reserve Bank and the Treasury which will initially enable the banks to advance R100bn of new loans, guaranteed by the government, to SMEs impacted by the Covid-19 crisis.
It adds to the payment holidays and debt relief the banks have already granted, using their own balance sheets, to tens of thousands of businesses since the crisis began.
Figures from the Banking Association of SA (Basa) show that by late April the banks had assisted more than 75,000 of the 90,000 commercial SMEs that applied for assistance, providing cash-flow relief that has reached R7.29bn so far and is still rising.
However, the guarantee scheme will enable banks to make new loans to keep their customers with good records afloat, says Basa CEO Bongiwe Kunene. That includes customers such as restaurants and hotels that may have no income until the lockdown is eased later this year.
“It’s in banks’ interest to keep money circulating, and ensure customers have the working capital to pay suppliers and keep the lights on, so that they can reopen,” says Kunene.
One banking analyst, noting banks don’t usually lend to customers who have no obvious income, echoes Kunene’s point.
“The real benefit for the banks is that it keeps their borrowers operational,” he says. The scheme will allow the banks to lend in cases where their normal risk appetites would not.
Adam Orlin, head of Investec for Business, says: “As we transition out of lockdown and come to terms with the ‘new normal’, we believe initiatives like these will go a long way to preserving jobs and creating the much-needed velocity of cash through the system – which will provide essential assistance to those businesses recording extremely limited or zero turnover.”
Funeka Montjane at Standard Bank’s personal and business banking division says the guaranteed loan scheme “will bolster efforts made in both the private sector and government to aid small business”. Customers in good standing with annual turnovers of up to R300m can apply to their banks for loans at the prime lending rate to cover three months of operating costs — such as salaries and rents — repayable over five years.
Absa, Capitec, Mercantile, FNB, Investec, Nedbank and Standard Bank are participating so far, and most have already launched the scheme.
Each will use its own normal credit processes to evaluate applicants and has the right to decline loans, though the state will cover 94% of the loss if a client defaults.
Some banks are already processing applications under the scheme, though bankers say it won’t necessarily be right for every client — especially since it means taking on debt that will ultimately have to be repaid.
Orlin says businesses should think carefully about the timing of their applications for loans.
“They need to assess if they need funding to get their business through lockdown, or funding for when their business will be coming out of lockdown — and thereby get the most out of the loan.”
Absa says its business banking customers tend to prefer tailor-made financing solutions, and it expects this trend to continue.
“We have also experienced a drop in credit demand and many of our clients are focusing on reducing costs in order to survive rather than incurring additional debt,” the bank says.