Response to the R200 billion loan scheme announced by government as part of a “phase two” response to the Covid-19 lockdown has been shockingly weak – to put it mildly.
Just 1% – or roughly R2 billion – has been taken up.
What’s going on?
Is the lockdown disaster less dire than we’ve been told, or are there other reasons?
Intellidex has produced a report on this and offers the following possible explanations:
- The offer of loans came seven weeks after the start of the lockdown – too late for many businesses to be of any real use, while similar schemes in other countries were available from the get-go.
- Despite a six-month repayment holiday, many companies chose to tough it out and reduce risk rather than taking in new loans, tempting as it might be.
- Though prime borrowing rates are at historically low levels, social distancing rules impact companies’ ability to generate revenue, with the six-month repayment holiday coming to an end just about the time another Covid-19 peak occurs.
- Borrowed funds may only be used for overheads such as rent, payroll, debt servicing and other fixed costs. This lack of flexibility accounts for some of the poor loan demand.
- Requirement for personal surety: given the economic uncertainties we face, the banks’ requirement that borrowers sign personal surety is a step too far for many.
- Intellidex says some businesses are being refused loans if they are part of a larger group. It originally estimated 200,000 of the 900,000 tax-paying companies in SA were eligible for loans, though even this figure now seems too high.
There are other problems, mainly on the banks’ side. For example, the government has placed a 94% guarantee (less the interest margin earned each year), which still leaves the bank with some downside. The banks are expected to apply their normal credit risk assessments in granting loans, but the fact that loans are not in high demand suggests the incentives are wrong, says Intellidex.
Furthermore, this is a breakeven scheme for banks, which means they are likely to look elsewhere for profits, such as the bond market.
National Treasury has split the R200 billion scheme into two tranches and will only make R100 billion available at first, waiting to see what the appetite is like before government commits another R100 billion. Treasury appears to have little idea of what the scheme will cost, nor the scale of defaults. Hence, its contingent liability is not well quantified, and its focus is on minimising risk rather than maximising it.
The R200 billion scheme is a vital element in the government’s recovery plans, and Intellidex expected it to have a 1.3 times multiplier effect – meaning that for every R100 directly borrowed, the economic benefits would total R130 through ancillary economic activity.
Fixing the scheme
Here are some proposals to fix the scheme:
- Remove restrictions on the use of proceeds: 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 adaptation to social distancing which should be open to coverage here, says Intellidex.
- Remove the cashflow structure: The current scheme pays out the principle in three tranches in the first three months. It follows from the above two considerations that this is an unnecessary cashflow restriction and should be replaced with a 100% facility available to clients to be drawn down as needed.
- Lower the cost, extend the term and possibly fix the rate. Loans are currently priced at prime and repayments kick in after six months. This is a function of the funding window that the SARB provides to underpin the scheme which is priced at the repo rate. Naturally, a reduction in this cost would increase demand, particularly as repo rates have been reduced as part of the monetary response to the crisis. A reduction of 100 basis points on the cost of funding to reduce the cost of loans to 100 basis points below prime is feasible – it would maintain the pricing above SARB’s highest priced windows (standing repo, which is currently at the policy repo rate). The reference to prime currently reinforces the “tyranny” of prime in the banking system which has no basis except precedent. Also, fix the rates to make repayments more certain for borrowers.
- Create an explicit budget for the scheme: The public finance aspects of the scheme mean it is difficult for government to signal its risk appetite appropriately. The R100 billion guarantee on the first phase of the scheme forms a contingent liability on the balance sheet of government, and there is no budget to cover cash calls in terms of the guarantee. We would propose that a medium-term expenditure framework appropriation is made in the emergency budget specifically for this scheme. This could be done above the line, but not department tied, through the contingency reserve line item. This would add to the fiscal credibility of the framework and provide transparency.
- Adjust the size restriction, by removing the R300 million turnover ceiling for qualifying businesses.
- Set an explicit credit vetting procedure: National Treasury should not rely on banks’ normal credit vetting processes, but set up its own to ensure money flows where it is needed.