SA’s great R200bn Covid bailout flop

It is two months since the introduction of a huge loan scheme of R200bn to help small businesses through the Covid-19 pandemic, and its performance has, so far, been dismal.

It was hailed initially as an enormous injection into the economy. But a meagre R7bn has found its way to SA businesses. In fact, according to Banking Association SA (Basa) MD Bongiwe Kunene, only 4,800 small businesses have been successful out of a chunky 29,700 that applied.

Of those, 5,200 companies did not meet the eligibility of loans as set out by the ultimate guarantors, the Reserve Bank and the National Treasury, a further 5,400 fell outside the risk appetite of the banks and 14,100 are still being assessed.

The scheme focuses on businesses with turnover of less than R300m that are in good standing with their banks but have no available borrowing capacity and (probably the easiest to prove) are negatively affected by the lockdown.

Basa was spurred into releasing the figures after research house Intellidex published a paper arguing that the scheme isn’t working.

“Elsewhere in the world schemes have been calibrated on the run at a very rapid front-loaded pace,” says Intellidex chair Stuart Theobald.

But rapid turnarounds are alien to the local banking culture, which prides itself on complex risk assessment processes.

Intellidex says several SA banks admit their credit granting systems cannot be adapted to quick turnarounds. This, then, is the nub of the problem, and Intellidex believes the credit assessment procedure needs to be different.

After all, with loans available through the scheme that have a 94% government guarantee, banks should be encouraged to lend at least as extensively as they did in 2007, in the days of easy loans before the global financial crisis.

Khaya Sithole, an accounting lecturer and analyst, says the information about each business should have been gathered in a central depository. “Two banks may reach a different conclusion about offering funds to a particular business. Why should a small or medium enterprise (SME) be forced to deal with its own bank and no-one else?”

Sithole says the scheme should be open to non-banks, which have a much greater risk tolerance than banks.

Theobald agrees, pointing out that the Rupert family’s contribution to the relief effort, mainly through SME financing specialist Business Partners, was a model of efficiency and effectiveness.

“At the moment banks are asked to apply their normal credit risk processes, which means the guarantee is not, in fact, achieving its goal of improving bank risk appetite,” says Theobald.

Kunene says the aim is for customers to be able to honour their Covid-19 loan commitments, which means the Treasury and the taxpayer will not incur any costs.

But Intellidex argues that if the scheme were fully rolled out, losses of about 20% would be realistic.

Theobald says it was introduced too late – seven weeks after the lockdown took effect – by which time companies had been forced to furlough or retrench staff. Essentially, businesses had gone two months without any support.

However, Kunene argues that banks have already made a contribution to their small businesses through R11.7bn of assistance, such as interest holidays. Yet that figure will include grants provided by the Oppenheimer family as banks administered these too.

In total, payments on loans worth R495bn have been suspended in both the personal and commercial sector.

Despite banks’ ingrained risk aversion, Theobald, a former news editor of the FM, says they are the only institutions that can really move at speed and deliver high volumes of loans to the business sector.

“The regulators should specify the credit assessment processes that can be followed, especially if the government is standing behind the schemes. In the UK Bounce Back scheme, banks can get money into accounts within 24 hours of the application. That’s because conditions are clearly set down.”

But Stanlib chief economist Kevin Lings says: “SA is still learning what works, as there was little need for emergency assistance during the 2008 global financial crisis.”

Karl Kumbier, CEO of Mercantile Bank, which specialises in small business, says a scheme had to be set up urgently as enterprises were unable to trade during lockdown but still had to pay salaries and suppliers.

The fund, which pays salaries and other overheads for three months with a six-month interest rate holiday, was set up after just 10 days of talks between the major banks, the Reserve Bank and the Treasury, when they finally took place.

Basa says that during declining economic conditions, when credit is in most demand, it is unfortunately tightened.

Yet small businesses find it harder to borrow on commercial terms, which is why the fund should have been a vital and speedy intervention. The idea was that the loan scheme would allow banks to increase their clients’ credit scores, as those banks would take, at most, 6% of any loss on the loans backed by the scheme, which is underwritten by the taxpayer via the Treasury.

Theobald argues that the six-month interest-free period is too short, especially as other support measures, for example from the Unemployment Insurance Fund, will run out at about the same time. “We have to take a realistic view on when business cash flows will have resumed sufficiently to start servicing debt again.”

Theobald also believes it is a mistake that banks insist on personal surety from business owners before granting loans. “Business owners cannot control lockdown policies,” he said.

Intellidex argues that setting the loans at the prime interest rate is far from generous when businesses are so squeezed and, with social distancing, will not be able to resume their prepandemic turnover.

Theobald is critical of the inflexibility of the loans too: they are payable over three months to cover overheads, but hairdressers and restaurants, for example, might prefer a one-off payment to refurbish their premises for the new normal.

Part of the problem, says Sithole, is that the limitations were introduced on the assumption that the fund would be oversubscribed. “Prescribing how the funds should be used is a form of overreach, in my view. It remains a commercial arrangement which is fully payable, not a grant.”

Theobald suggests that restrictions on paying dividends and shareholder loans be reviewed, as these are often used by the owners to pay themselves, and most have deferred these payments already over the past three months.

Lings agrees that the scheme could have been much more attractive from a financial perspective, since it is developmental and not aimed at profit maximisation. “The primary objective is to keep as many businesses as going concerns through this phase and keep as many people employed as possible.”