Picture: REUTERS
Picture: REUTERS

A crucial piece of the government's R500bn Covid relief package has yet to deliver on any meaningful scale, with small and medium businesses having so far taken up just R7bn of the state-backed R200bn loan guarantee scheme that was meant to help them survive the crisis.

The banking industry is in talks with the Treasury and the Reserve Bank to improve the terms of the scheme, which was launched almost six weeks ago and is core to maintaining jobs and capacity and supporting the reopening of SA's economy.

A report by consultancy Intellidex released this week suggests that if the loan scheme does not deliver, SA could see GDP contract by 15.5%, rather than the 10.4% contraction that would result if the full R500bn package were successfully implemented.

The scheme, launched on May 12, is a partnership between the government, banks and the Reserve Bank that enables SA's commercial banks to extend an initial R100bn of new loans to businesses with annual turnovers of up to R300m.

But the loans come with fairly restrictive conditions and even though the government is liable for 94% of the loss on loans that default, the scheme requires the banks to use their normal credit approval methods rather than increasing their appetite to lend to higher-risk businesses.

Uptake was initially slow and the Banking Association SA said on Thursday it is already renegotiating the conditions to provide the banks with more flexibility to approve loans.

Banking Association MD Bongiwe Kunene said banks received 29,700 applications for the Covid-19 loans and declined 10,600 because they did not meet the eligibility criteria or the banks own risk criteria.

The banks granted loans to 4,800 enterprises and are still assessing 14,100 applications. In all, 200 applicants whose loans were approved declined to take them up.

Kunene said many companies had already found alternative sources of funding by the time the scheme was launched, and others had already decided to close.

Banking Association MD Bongiwe Kunene says companies found other funds.
Banking Association MD Bongiwe Kunene says companies found other funds.

Conditions such as the requirement to provide personal suretyship for the loans were also a deterrent for some entrepreneurs, while many simply did not want to take on more debt.

In addition, the money can be borrowed only to cover overhead costs such as rents, salaries and debt servicing - but, said Kunene, "faced with an existential threat, many may legitimately want to use the funds to see how to change their operating models, for example by setting up new distribution channels such as e-commerce to reach their clients".

Intellidex proposed this week that restrictions on the use of the proceeds be removed: "If a restaurant or hair salon wants to use the lockdown period to remodel, let them - it will create employment. There are also costs to adapting to social distancing, which should be open to coverage here," said Intellidex chair Stuart Theobald.

He proposed removing several other restrictions as well as lowering the cost and extending the term of the loans, which currently have a six-month interest holiday but then have to be paid back over five years. And the report calls for the Treasury to create an explicit budget for the scheme to cover cash calls on the guarantee when loans default.

Kunene conceded that one reason take-up of the loan scheme has been low is that many of the customers who meet the criteria have already been assisted by their banks, which since the start of the crisis have provided a total of R11.7bn of debt relief to more than 124,400 commercial, small and medium enterprises.

But these debt relief arrangements - which provide leniency on repayments, not debt write-offs - were generally for only three months. And with some starting to expire this month, Kunene encouraged businesses to go back to their bankers.

Talks are also continuing on extending the loan guarantee scheme to non-bank funders of small and medium enterprises, after the Black Business Council approached the Treasury on this last month.

The Intellidex report calculates that the five largest banks had granted forbearance on R495bn of loans, equivalent to 15% of their entire loan books.

The Banking Association estimates that more than R300bn of banks' loan books is at risk of default, with mortgage loans accounting for 59% of this.