Mike Brown. Picture: FREDDY MAVUNDA
Mike Brown. Picture: FREDDY MAVUNDA

The government’s Covid-19 loan guarantee scheme — aimed at helping businesses battered by the pandemic fallout — has gone live.

The scheme will provide government-guaranteed loans to firms with a turnover of less than R300m, to help cover their operational expenses such as salaries, rent and lease agreements. The money will be made available through six participating banks: Absa, First National Bank, Investec, Mercantile Bank, Nedbank and Standard Bank.

The scheme’s activation, announced jointly by the National Treasury, the SA Reserve Bank and the Banking Association SA  (Basa) on Tuesday, comes as level 4 lockdown restrictions in their second week hit South African companies.

Big companies in a range of sectors have filed for business rescue, including horse racing operator Phumelela Gaming and Leisure, private sector aviation company Comair and retailer Edcon while more than four out of 10 formal businesses fear they will not be able to survive the crisis, according to a recent Stats SA survey.

The Treasury said that it had provided a guarantee of R100bn to the scheme — with the option to increase the guarantee to R200bn “if necessary and if the scheme is deemed successful”. It forms part of the R500bn stimulus package announced by President Cyril Ramaphosa in April.

“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,” the Treasury said in a document outlining the mechanics of the scheme.

The intention was not for the banks to make a profit from the loans, and any net profits would be pooled to offset losses in the scheme to minimise total losses to SA taxpayers, the Treasury said.

“It will assist businesses that are facing liquidity issues to stay alive for the duration of the lockdown and return to being economically productive once the restrictions are lifted,” said Mike Brown, CEO of Nedbank. 

Brown, who is also the chairman of Basa, said this was an incredibly complicated process that involved an enormous amount of work from his organisation, the Treasury, the Reserve Bank and the banks themselves.

“Over the long term, its effectiveness will be based on how many businesses and jobs will be saved as a consequence of this. We intend to reassess things as we proceed, and this may lead to subsequent revisions,” Brown said.

Under the loan scheme, the Treasury would provide a guarantee to the SA Reserve Bank, which would be recorded as a contingent liability on the government’s account. The Bank would then lend the money to commercial banks at the repo rate — now 4.25% — plus a 0.5% “guarantee fee”.  

Banks would then lend this money to small and medium-sized businesses at the repo rate plus 3.5%. The business had to have an existing relationship with the bank granting the loan, be registered with Sars and be financially distressed as a result of the Covid-19 outbreak and subsequent lockdowns.

The Bank would keep a record of amounts owed by each bank as well as the default rate, and would report yearly on how much money each bank had used, along with the performance of their Covid-19 loan portfolios.

Businesses wanting to apply needed to meet conditions. These included that the money could be used only for operating expenses and not to pay dividends, make investments, pay bonuses or pay off other loans. Each applying business may get only  one loan under the scheme and had to repay the loan over five years.

The scheme’s activation follows finalisation of legal details by the Treasury and the Bank — and the risk for the loans will be shared between government and the commercial banks.

Though the lockdown measures have been deemed necessary to slow the spread of the coronavirus, it will cost the economy. Depending on the ultimate severity and duration of the lockdown, the Treasury’s research suggests the economy will contract between 5.4% and 16.1% in 2020 and that 3-million to 7-million jobs could be lost.

Projections from the private sector are even gloomier: Basa estimates SA's GDP could contract between 10% and 16.7% in 2020 despite the stimulus package.