Applications are flowing in for the R200bn Covid-19 bank loan scheme, through which loans to businesses are guaranteed in substantial part by the government. The volume and adjudication of these applications will be crucial in determining the size of the scheme’s economic effect.

Banks have a challenge on their hands in administering it. Their risk is limited — if loans go bad, they absorb 6% of the losses and any losses that can be covered by the margin they earn — about 2% per year and a 0.5% guarantee fee. The rest of the loss is absorbed by the government. This should make banks quite relaxed in taking on exposure. While they won’t make any money out of it directly, the loans are subordinated and thus rank behind their existing exposures to clients. A Covid-19 loan therefore provides a buffer that reduces bank risk in their core books...

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