Demand for Covid-19 Loan Guarantee Scheme ‘remains below expectations”

Just below R18 billion in pandemic-linked relief funding has been approved by South Africa’s banks and taken up by small and medium businesses as of mid-January under the government’s Covid-19 Loan Guarantee Scheme.

That’s the word from the Banking Association of South Africa (Basa), which issued an update on the scheme on Wednesday.

This is well below expectations of government, the SA Reserve Bank (Sarb) and the banking industry in what was meant to be one of the flagship business support measures as part of the government’s R500  billion Covid-19 social support and economic relief package announced last year.

When it was first announced, President Cyril Ramaphosa revealed that around R200 billion of the R500 billion overall relief package would be allocated to the Covid-19 Loan Guarantee Scheme.

Read:
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However, Finance Minister Tito Mboweni later clarified that the initial tranche for the scheme would be R100 billion.

Using the latter figure, this means that less than 20% of the scheme’s funds have been accessed by businesses affected by the Covid-19 economic fallout.

Basa conceded in its latest update that “demand for the scheme remains significantly below the original expectations.

It says that participating banks “expect applications for the scheme to slow-down further in the coming months”.

“This is despite an expected increase in financial pressure on small enterprises, especially those in the hotel and tourism sector due to restrictions on their businesses under the adjusted level three lockdown regulations,” the association adds.

Based on present trends, Basa believes that “it is probable that only R18.9 billion in loans will be approved under the scheme”.

Several reasons have been put forward for the low take-up of the Covid-19 Loan Guarantee Scheme, including:

• Business owners remain reluctant to incur more debt, due to the challenges presented by inconsistent policy and regulation, uncertain business conditions and a weak economic outlook. Basa said that these challenges hamper business owners’ ability to generate sustainable income, which they need to repay the loans.
• The slow pace of economic reform, an unreliable electricity supply and lack of inclusive growth, as well as the subsequent weak consumer and business confidence, has also reduced opportunities for enterprise and the associated need for credit.
• As part of their usual business, banks offer relief to their customers who are in financial distress. Banks will continue to offer their personal, business and corporate customers, who qualify, bespoke payment breaks and debt restructuring assistance. The association notes that for many businesses, this is a better option than the loan guarantee scheme.

“Basa understands that the Covid-19 Loan Guarantee Scheme – conceived and implemented at great speed in a time of crisis – has not achieved all it set out to do….

“However, banks assistance to their customers and their contribution to the recovery and reconstruction of the economy goes well beyond the Covid-19 Loan Guarantee Scheme,” it says.

“As implementing partners of the loan scheme, banks have been given the responsibility to ensure that taxpayers’ funds are not exposed to undue risk of the loans not being repaid. Covid-19 loans can only be extended to business that meet the criteria set out by the Sarb and National Treasury and banks’ prudent risk management policies,” Basa adds.

Basa stressed that the scheme does not extend grants or equity to companies in financial difficulties nor assist those that are in distress for reasons other than those related to the pandemic.

“Only the Sarb and National Treasury can make any changes to the operations and criteria of the scheme,” it says.

“However, the Covid-19 Loan Guarantee Scheme on its own cannot address all of the financial and business challenges facing small enterprises, many of which pre-date the pandemic and were caused by a lack of inclusive economic growth and uncertain business conditions,” in notes.

Basa says that government “will have to implement other business and financial support programmes to ensure small and medium enterprises survive the present crises” and can create jobs and spur inclusive economic growth.

“As of 16 January 2021, the scheme received 48 366 applications for loans, of which 27% were approved by banks and were taken-up by the applicants,” it points out.

The association says around 5% of the applications are still in the process of being assessed, while 46% of applications have been rejected.

It notes that the rejected applications did not meet the eligibility criteria for the scheme, as set out by the Treasury and the Reserve Bank, or because applications  did not meet banks’ risk criteria.

Around 82% of loans approved as part of the scheme went to enterprises with a turnover of up to R20 million.