Treasury, the South African Reserve Bank, and the Banking Association of South Africa have launched a new loan guarantee scheme.
The scheme is an initiative to provide loans, guaranteed by the government, to eligible businesses with an annual turnover of less than R300 million to help them meet some of their operational expenses.
Funds borrowed through this scheme can be used for operational expenses such as salaries, rent and lease agreements, contracts with suppliers, among others.
The scheme was first announced by President Cyril Ramaphosa in April, and will be available through a number of participating banks including:
- First National Bank;
- Mercantile Bank;
- Standard Bank.
Treasury said that government and commercial banks are sharing the risks of these loans.
Initially, the National Treasury has provided a guarantee of R100 billion to this scheme, with the option to increase the guarantee to R200 billion if necessary and if the scheme is deemed successful.
As part of the announcement, Treasury published a Q&A document which outlines some of the key points of the new scheme.
Some of the most important issues that the document addresses are outlined below:
Which businesses qualify?
To qualify for the loan, a business must have an annual turnover of less than R300 million (measured at a group level) and be in good standing with its bank.
This means that the business must be up to date with its other loan payments or be an account holder without any loans as at end-February 2020.
The business must have an existing relationship with the bank granting the loan, be registered with SARS and be financially distressed as a result of the Covid-19 outbreak and subsequent lockdowns.
Eligible businesses should contact their primary or main banker. Further queries should be directed to the individual banks, which are administering the scheme.
What conditions are attached?
The loan can only be used for operational expenditure such as salaries, rent, utilities and ordinary-course supplier payments.
Businesses may not use these loans to pay dividends, make investments, pay bonuses or pay off other loans that the business may have.
The loan amount will be disbursed to the customer in up to three monthly instalments. After that, no payment is expected from the customer for a further three months.
The customer then has five years to pay off the loan and associated interest. The interest rate is fixed at the repo rate plus 3.5%. Banks cannot vary this condition. This implies that the interest rate will change when the repo rate changes.
Each applying business is entitled to only one loan under this guarantee scheme. In addition, banks may ask customers to provide security or suretyships for this loan and may impose additional conditions as each bank deems fit.
Banks are not obliged to extend Covid-19 loans. They will use their risk evaluation and credit application processes to approve or decline applications.
What happens if the business closes?
If a business that has taken a loan goes into liquidation, the Covid-19 loan is treated as equity and therefore ranks behind other creditors.
The loan guarantee scheme is intended to help small and medium-sized businesses. While these arrangements are designed to encourage banks to lend more than they would otherwise lend, banks are expected to make sound lending decisions and avoid reckless lending.
The intention is not for banks to make a profit from these loans.
Any net profits will be pooled to offset losses in the scheme, so as to minimise total losses to South African taxpayers.
The full document can be read below: