South Africa extends ‘ineffective’ R200 billion Covid-19 loan scheme by another 3 months

The National Treasury has extended its Covid-19 Loan Guarantee Scheme (LGS) by a further three months.

The LGS was announced by president Cyril Ramaphosa on 21 April 2020 as part of the government’s economic stimulus package and was designed to support small businesses that were experiencing financial distress as a result of the Covid-19 pandemic.

It was officially launched by Treasury, the South African Reserve Bank and the Banking Association South Africa (BASA) on 12 May 2020.

As of 27 March 2021, banks had approved 14,827 in loans to the value of R18.16 billion.

The total number of loan applications received since the beginning of 2021 to 27 March 2021 is 1,787. Of these, banks approved 511 applications, of which only 97 were taken up by clients.

The end of the availability period was 11 April 2021 for most participating banks under the guarantee scheme.

However, after further consultation, the National Treasury, the South African Reserve Bank and the BASA have agreed to extend the deadline by three months to 11 July 2021, and in the process to harmonise this deadline for all participating banks.

“The guarantee scheme will continue to service all loans advanced up to the extended date, for up to five years,” Treasury said.

“The further extension of three months will enable an orderly winding down of the scheme and allow those businesses who have applications already lodged to be assessed.”

Not as effective as hoped 

Treasury said that the LGS has not been as effective as originally envisaged, as many distressed companies have been reluctant to assume more liabilities through further loans, with little certainty of the length and severity of the economic impact of the Covid-19 pandemic.

However, it said that in addition to this guaranteed loan scheme, banks have provided significantly more support to their small business customers via their own balance sheets, totalling at least R33 billion in payment relief between April and November 2020.

Such support reduced demand for the LGS. Banks have also restructured loans and credit facilities worth billions more to their clients and corporate customers in financial distress, it said.

The Financial Sector Conduct Authority (FSCA) has also provided further support to businesses and individuals by adjusting regulations to support insurance premium relief for policyholders, allowing them to claim while minimising disruptions to the expected income of intermediaries.

“The National Treasury continues to monitor the impact of the Covid-19 pandemic on the economy and jobs, and recognises the challenges facing both small and large businesses, particularly those in the hardest-hit sectors,” it said.

“Existing support measures by the South African Reserve Bank and FSCA, as detailed in the 2021 Budget Review, will continue, subject to conditions and regulatory mandates.”

Criticism 

The Banking Association of South Africa (BASA) has been particularly critical of the loan scheme, and has accused government of not doing enough to provide support.

Initially, the National Treasury provided a guarantee of R100 billion to the scheme, with the option to increase the guarantee to R200 billion if necessary, if the scheme was deemed successful.

However, a year on and the demand for the scheme remains significantly below the original expectations – and participating banks expect applications for the scheme to slow down further in the coming months, BASA said in February.

“This is despite an expected increase in financial pressure on small enterprises, especially those in the hotel and tourism sector due to restrictions on their businesses under the adjusted level three lockdown regulations.

“Based on present trends, it is probable that only R18.9 billion in loans will be approved under the scheme,” it said.

The association said that business owners remain reluctant to incur more debt due to the challenges presented by inconsistent policy and regulation, uncertain business conditions, and a weak economic outlook.

These hamper business owners’ ability to generate sustainable income, which they need to repay the loan, it said.

As part of their usual business, banks offer relief to their customers who are in financial distress. The association said that banks will continue to offer their personal, business and corporate customers, who qualify, bespoke payment breaks and debt restructuring assistance.

“For many businesses, this is a better option than the loan guarantee scheme. BASA understands that the Covid-19 Loan Guarantee Scheme – conceived and implemented at great speed in a time of crisis – has not achieved all it set out to do.

“However, banks’ assistance to their customers and their contribution to the recovery and reconstruction of the economy goes well beyond the Covid-19 Loan Guarantee Scheme.”


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South Africa extends ‘ineffective’ R200 billion Covid-19 loan scheme by another 3 months