In a further initiative to combat the economic fallout of the COVID-19 pandemic, the state, in collaboration with the banking sector and the South African Reserve Bank (SARB) has announced a R100 billion loan scheme to assist ailing small and medium-sized businesses (SMMEs).
On 12 May 2020 National Treasury, the SARB and the Banking Association South Africa released a joint media statement announcing the immediate activation of a loan guarantee scheme which will provide an additional source of funding to SMMEs.
The loan guarantee scheme will equip commercial banks with funding to provide loans to businesses with an annual turnover of less than R300 million. Loans made under the scheme will be offered at prime interest rate, come with an initial 6 month repayment holiday and up to 60 months to repay thereafter.
Businesses can access the loan scheme through the commercial banks who will in turn receive loan funding from the SARB. The scheme is underpinned by National Treasury, which provides a guarantee in favour of the SARB. The risk allocation model of the scheme is such that the state will carry most of the risk of defaults which result in losses. Practically, the losses will be allocated as follows:
- The net margin on the loan portfolio (approximately 2%) is pooled as the first loss buffer.
- The 0.5% guarantee fee charged by the National Treasury is the second loss buffer.
- The commercial banks will take the third loss, up to 6 % of the amount loaned by that particular bank in terms of the scheme.
- After that, losses will be borne by National Treasury.
National Treasury has provided a guarantee of R100 billion to the scheme, with the option to increase the guarantee to R200 billion. Funds borrowed through the scheme can be used by businesses for operational expenses such as salaries, rent and lease agreements, contracts with suppliers, etc.
Businesses are cautioned from assuming that the scheme will provide easy access to cash because each business will be required to comply with a set of qualification criteria that will be applied by participating commercial banks. The participating commercial banks are not obliged to extend any loans and approval of applications by qualifying businesses are subject to the banks’ risk-evaluation and credit-application processes. Lenders must not overlook their obligations under the National Credit Act to individual and small business borrowers though over-indebtedness enquiries can take into account the prospects of any such borrower
The COVID-19 guaranteed loan scheme presents a unique economic stimulus mechanism that will undoubtedly offer some relief to SMMEs. The collaboration and risk strategy adopted by the public and private sector participants will go some way in building much needed cohesion in the fight against COVID-19 and is a positive indicator that the South African government is committed in its efforts to stabilise the South African economy.