Regardless of what anyone thinks or feels, banks need their clients as much their clients need them – it’s a codependent relationship. 

Generally, the healthier the relationship, the better the economy. But this has been threatened by the Covid-19 pandemic and the economic crisis that it has unleashed. 

South African banks could collectively see a R120-billion decline in revenue compared with 2019, which will leave them R35-billion in the red in 2020, according to analysis by economic research company Intellidex.

This does not bode well for the 903,320 odd firms that are expected to submit tax returns this year. Many of these firms will find themselves under severe pressure and will be turning to their banks for an extension on existing loans or for bridging finance.

“This is a stressed environment for banks, which will drive them to behave conservatively, reducing risk tolerance and therefore their willingness to extend credit, at exactly the same time that they are expected to play an important role in confronting the crisis,” says Stuart Theobald, CEO of Intellidex, and author of the report Bank guarantee scheme to bridge finance the economy.

Thus, the R200-billion loan guarantee fund, which was announced by President Cyril Ramaphosa on Monday night, is essential medicine for the economy.

“The purpose of the scheme is for government to help businesses with a turnover of less than R300-million with operational cash flow shortfalls from the shutdown and as a result help the economy and save jobs,” says Mike Brown, CEO of Nedbank.

“Like elsewhere in the world, the most efficient way to implement this is through the banking system, with government providing suitable risk-sharing support and access to funding for banks to facilitate this.”

National Treasury, the South African Reserve Bank and commercial banks have aligned on the key principles to underpin this in terms of eligible customers, funding and risk sharing, he says.

However, officials are still working through the final details, approvals and documentation prior to implementation as announced by the president.

“We need to ensure the risk-sharing and funding arrangements between government and banks on these loans are designed [in a way that they] ensure the stability of the financial system, while also supporting the economy and job protection,” says Brown.

In other words, what will the loan cost companies and how will the risk of bad loans (impairments) be split between the banks and the SARB? 

What is clear is that banks are galvanising themselves to be able to provide support to both clients and non-clients by the end of April – before companies start to fall over.

“We’ve worked with the government, SARB and five other banks to put this initiative in place,” says Karl Kumbier, CEO of Mercantile Bank, which is owned by Capitec. “This initiative will see us inject R200-billion of liquidity into the economy so that people are able to pay each other again. 

“It’s been 10 days of hard work with the transaction only concluded on April 21st. And now the real hard work starts – we’re going to get out there and ensure that businesses can grow and get the economy up and running again as the lockdown eases.”

It is anticipated that the facility will support 700,000 companies and more than three million employees.

Loans will be made to companies at a reduced rate – more than the repo rate of 5.25% but less than commercial rates of prime plus, which is 8.75% plus the risk rate, which is determined on a company by company basis. 

It’s likely that companies will also have a 12-month payment holiday on the loan (during which interest is capitalised), after which they will have another two years to repay it.

While neither the banks nor the SARB expects to make profits in this process, they will need to cover their administrative costs at the very least.

It is anticipated that the Covid-19 Loan Guarantee Fund, as it has been dubbed, will be funded out of public resources and international assistance, with a portion – R12-billion has been touted – being funded off the banks’ own balance sheets. 

The SARB will act as the principal guarantor, providing an irrevocable guarantee to the bank, and each bank will sign a standardised agreement with it.

To qualify for a loan, companies will have to be in good standing with their bank; be registered with the tax authority; have no available borrowing capacity, and be adversely impacted by the lockdown. 

At the same time, they need to be financially viable. “There is no point in funding a company that was in distress before the lockdown and is not likely to survive,” says Theobald. 

It is expected that the funding will be used exclusively for salaries and wages, rentals and lease payments, utilities and other operating expenses.

Unintended consequences and bad behaviour also need to be ruled out.

“The purpose of this fund is to support the economy, which directly benefits the banks. Ideally, we will see all of the banks sharing the load when it comes to loan disbursement. This was the case when it came to mopping up after African Bank,” he says.

While the healthy working relationship between SA’s banks and the regulator may be unusual when compared with other jurisdictions like the UK, this type of funding arrangement is not unique. 

More than 50 countries, from Algeria to the UK, have provided some form of bank guarantee scheme as part of their economic response to the crisis. 

The size of support ranges from up to 15% of GDP in the case of the United Kingdom to the more usual 1.8% of GDP, equivalent to South Africa. BM