ANALYSIS

Are banks being honest about why support has failed?

By Tim Cohen 17 October 2020

The loan system was supposed to inject R200-billion into the economy for businesses that were going to struggle to survive the lockdown’s dire economic consequences. (Photo: Waldo Swiegers/Bloomberg via Getty Images)

There has been a huge focus on the number of government contracts for Covid-19 pandemic related tenders that have ended up being absurd get-rich-quick schemes. But the private sector hasn’t covered itself in glory either.

First published in Daily Maverick 168

Speed, it turns out, is often a necessity but can be its own curse too. When the pandemic broke out, the government and the rest of civil society appreciated the need for speed.

But nothing illustrates how broken we are as a society more than trying to do something very difficult at speed. The Special Investigating Unit is now probing 658 Covid-19 personal protective equipment tenders and other pandemic related contracts worth R5.08-billion. That is almost half the entire budget.

On the public sector side, speed it turns out has also been a problem for different but related reasons. When it came to keeping businesses going, the government roped in the banks and made them responsible for the largest slice of the effort.

That seemed so sensible at the time. Effectively, government would be leveraging existing infrastructure to inject quick medicine into the economic system. Turns out, it didn’t work. But the question is why, and who is responsible?

As Ray Mahlaka reported in Business Maverick this week, government’s Covid-19 loan guarantee scheme is still stuck on the runway. Recall, the loan system was supposed to inject R200-billion into the economy for businesses that were going to struggle to survive the lockdown’s dire economic consequences. It has been two months since the scheme underwent a makeover to improve its reach to struggling small businesses during the pandemic.

Since the changes to the scheme came into effect in August, additional loans worth less than R1-billion were distributed by the end of September, which brings the total value of loans approved and disbursed since the scheme’s introduction to R16.08-billion.

“In other words, about R180-billion could be sitting idle in the banking system when some businesses could use the loans to revive their operations under a level one lockdown economy,” Mahlaka reported.

Now the banks claim this is not their fault. MD of the Banking Association SA Bongiwe Kunene says there was a lot of uncertainty when the idea was mooted because banks had to determine how the loans would be treated. Speed, once again, was a challenge.

But beyond that, Kunene said business owners had been reluctant to incur more debt in the uncertain economic environment. This is no doubt true, but this uncertainty was precisely what the loan system was supposed to be addressing.

In response to that story, Business Maverick has had a lot of negative feedback from readers, who say what the banks have been saying is just bunk – the bigger problem is that they view the government-guaranteed loans a competition to their own much more expensive loan products.

Hence they have been soft-pedaling the loan process, hoping their clients would be so desperate, they will end up taking out much more expensive bank loans. One reader, Jan Badenhorst, the CEO of a training business, the Skills Academy, said as an applicant himself and someone who had helped others apply, the process was farcical.

Even though the loan was government-guaranteed, you had to sign a personal surety too. Just getting the documents was an effort. Of the nine banks that offered the loans, three didn’t mention it at all on their websites, he said. The reasons loans were turned down were not explained, and there was no real visible effort on the part of the banks to advertise or distribute the loans.

Badenhorst said every time a loan was refused, he was simultaneously offered a much more expensive ordinary loan. The key problem is that government-guaranteed loans have to be made at less than the repo, which is currently 3.5% and bank loans are priced generally at about 9.5%. Every time a bank grants a Covid loan, it effectively crosses off a potential customer from its list.

Obviously, banks have to be cautious loaning out money for which taxpayers might end up having to carry the can, and it’s easy to appreciate how difficult it must be.

But if banks claim people are cautious about taking out loans in the current economic environment, they need to explain why the Rupert family’s Business Partner’s Sukuma Relief Programme managed to disperse R1-billion over a weekend.

In a written response to the question whether the loan scheme had failed, Jesse Weinberg, SME Customer Segment Head at FNB, said  the following: 

“FNB has approved over R1.2 billion under the COVID-19 Loan Scheme to help businesses whose finances have been impacted by the pandemic.

“R1-billion of the total loans approved were to over 3 800 small and medium businesses with an annual turnover up to R60 million per annum.

“In terms of the Government Guarantee Covid-19 Loan Scheme, FNB must apply standard credit assessment practices as required by National Treasury. This would apply to suretyships where required within these practices.

“National Credit Act (NCA) practices continue to be applied where applicable. Outside of this regulation, it is standard practice for business owners to provide surety for lending. Surety applies to a business that is a separate legal entity. However, Sole Proprietors are exempted as they are by implication standing good for the credit.

“Commercial Banks and the National Treasury share the risks of the scheme. The SARB takes no financial risk in the scheme as its loans to banks are guaranteed by the National Treasury. The SARB have mandated the commercial banks to maintain good lending practices, this is in the interest of sound customer (business) borrowing in South Africa and the fiscus.

Furthermore, FNB does not profit from the Covid-19 Loan Scheme.

It is imperative to note the following with respect to the COVID-19 Loan Scheme for SME’s:

1.           Lending rate is prime, this is a favourable rate for unsecured loans to SME’s
2.           A term of 67 months is significantly longer than normal repayment terms
3.           No repayments are required for the first six months, to assist SME’s through the lockdown period
4.           The above are more favourable terms than would be available in normal circumstances
5.           Commercial banks remain economically neutral and do not profit from the loan scheme
6.           It is in the interest of the South African economy, that loan recipients are required to adhere to under normal credit practices to repay these loans;
7.           There is no BEE shareholding requirement for the Government Guarantee Covid-19 Loan Scheme.

Finally, the government has specified that the Government Guarantee Covid-19 Loan Scheme is available to businesses:

1.           With turnover less than R100 million
2.           In good standing prior to 29 February 2020 (prior to the onset of the main impact of COVID-19 in South Africa)
3.           That are registered as taxpayers with the South African Revenue Services (SARS)
4.           That are sole proprietors or are registered legal entities with the Companies and Intellectual Property Commission (CIPC)
5.           That have been negatively impacted by Covid-19

We remain committed to working closely with government and South African banks to help businesses minimise the impact of COVID-19″. DM/DM168

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All Comments 5

  • The banks would not give the government guaranteed loans. I have two restaurants and was forced to use expensive bank loans to keep the businesses open. Now starts the long and painful payback.

  • Banks are greedy, it’s as simple as that. How about 5 year simple interest based loans based on 3.5% for qualifying SME’s?
    That would inject liquidity into the marketplace freeing up money to be used to expand the business/hire staff etc that is instead being spent serving a loan’s interest payment.

  • The observations of the author reflect our company’s experience as well, there is only one explanation why the Government Guarantee Covid-19 Loan Scheme is vastly under-subscribed, and that is because the commercial banks simply do not want to approve and manage loans under this scheme, as there is seemingly not enough in it for the banks. We need to challenge the Banks to play their part for the well-being of the country and the preservation of jobs by assisting badly affected small businesses to survive this unprecedented economic crisis, thereby assisting in preserving the investment and value that has been created in these businesses over many years.

  • The comment from the FNB spokesman with a fancy title is exactly what you would expect from a bank who is far more concerned about making profits than making any effort to assist SMB’s.
    The practice of personal sureties for business loans should be made illegal. It is a mechanism that merely covers the bank’s inability to evaluate the viability of a business. If the risk is high then this can be priced into the interest rate.
    This attitude and bank practices for SMB’s goes some way to contributing to the scarcity of this sector in South Africa.

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