R100bn Covid-19 loan scheme now operational

The R100-billion Covid-19 loan guarantee scheme announced by President Cyril Ramaphosa in April will operate from Tuesday (today).

The Covid-19 loan guarantee scheme wills see participating banks – Absa, First National Bank, Investec, Mercantile Bank, Nedbank and Standard Bank – consider loan applications for “distressed businesses which bank with them”.

Under the scheme businesses with a turnover of less than R300 million a year can apply for a loan, pending certain conditions like being up to date on other payments with their bank.

National Treasury will provide a loan guarantee of R100 billion. This guarantee can be increased to R200 billion if necessary.

Funds borrowed through this scheme can be used for expenses such as:

• Salaries,
• Rent and lease agreements,
• Utilities
• Contracts with suppliers, etc.

Businesses may not use these loans to pay:

• Dividends
• Make investments,
• Pay bonuses or
• Pay off other loans that the business may have

Government and commercial banks are sharing the risks of these loans. The South African Reserve Bank (Sarb) takes the financial risk in the scheme, as its loans to the banks are guaranteed by Treasury.

If a business defaults on a loan, banks can claim on the guarantee from Sarb, which will, in turn, claim the funds from Treasury. This will only happen after banks have followed the procedure outlined above and their standard recovery processes. If a bank initiates such a claim, Sarb will require an independent audit to ensure that sound lending practices were applied.

The loan guarantee scheme is intended to help small and medium-sized businesses.

“While these arrangements are designed to encourage banks to lend more than they would otherwise lend, banks are expected to make sound lending decisions and avoid reckless lending, said Treasury.

“The intention is not for banks to make a profit from these loans. Any net profits will be pooled to offset losses in the scheme, so as to minimise total losses to South African taxpayers.”

More details on the scheme can be found in a frequently asked questions guide posted here: treasury.gov.za, resbank.co.za and Banking Association SA