Banks have disbursed just over 5% of the R200 billion Covid-19 loan scheme created to assist small businesses that were experiencing liquidity issues due to the nationwide lockdown and Covid-19.
The loan guarantee scheme was launched in May to provide loans to businesses with an annual turnover of less than R300 million. The use of the loans is limited for operational purposes and may not be used for things such as repaying other loans or providing dividends.
In its latest update on the various initiatives run through the banks to provide customers with relief through this period the Banking Association of South Africa (Basa) said R10.6 billion in loans has been provided to just under 7 500 business.
An initial R100 billion has been provided for the scheme, with the option of increasing it to R200 billion depending on demand.
“Cash flow relief for eligible individuals and businesses is critical to the preservation of jobs and businesses and to maintaining a functioning economy,” said Bongiwe Kunene, managing director of Basa.
“Banks hold in trust the salaries and savings of South Africa’s workers, professionals and businesses. It is therefore essential that we continue to extend credit responsibly and avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector”.
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Since the scheme was launched participating banks have received close to 33 965 applications of which 37% (12 660) were rejected either for not meeting the bank eligibility criteria or the eligibility criteria set out by the National Treasury or the South Africa Reserve Bank (SARB).
The remaining 13 806 applications are still being assessed and R104 million worth of loans which were approved, about 315, were not taken.
The loan scheme’s low uptake has been blamed on the qualifying criteria which places onerous demands on entrepreneurs and does not increase the banks’ appetite to approve loans, in turn, subverting the purpose of the scheme to get funding out to businesses in need in order to avoid closures and a loss of jobs.
Read: ‘Significant increase’ in R200bn Covid-19 credit guarantee scheme loans
Financial market research group Intellidex whose proposal underpins the final design for the scheme has noted that restrictions on what the money can be spent on, requests for personal suretyship and a short payment relief period of six months were some of the issues which contributed to business owners being reluctant to take up the loans.
While the National Treasury provides over 90% guarantee for loans disbursed through the scheme it requires banks to apply their normal credit risk processes. Failure to do so could result in Treasury refusing to payout guarantees on defaulting loans. As a result, banks are not incentivised to lend more.
Basa said that discussions between the banks, Treasury and the Sarb on amending some of the criteria to make the crisis loans more accessible to businesses were still continuing and “details will be made available as soon as they are agreed”.
Beyond the loan guarantee scheme, banks had also provided customers with the option of taking up a three-month payment relief for individuals and businesses under financial distress in this period.
Over R30.6 billion in relief was approved as at June 27, three days before the initiative expired.
A break down of the numbers shows the bulk of the relief, about R18.26 billion, was taken up by individual customers with banks approving 83% of the 2.9 million applications it received.
Relief granted to businesses of all sizes amounted to R12.4 billion with a 95% approval rate from the just under 140 000 applications received.
“A number of banks have already announced details of further relief on offer to their customers. The offering of each bank depends on their individual capacity and risk management policies,” said Basa.
Basa also clarified that the debt relief programmes were not debt write-offs but “a relaxation of repayment terms to assist otherwise viable businesses to remain solvent and continue to pay suppliers and employees during the current crisis”.
Similarly, loans through the Covid-19 Guarantee Scheme should not be regarded as grants but rather commercial agreements with “low-interest rates and [a] preferential repayment term”