COVID-19 Loan Guarantee Scheme: Treasury, BASA & SARB Input

Meeting report

Briefing by the National Treasury on the COVID-19 Loan Guarantee Scheme

Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, argued that that the Treasury anticipated that the Level 5 Lockdown that started on 26 March 2020 would have a significant economic impact. A package of COVID tax proposals was announced in March and again in April. The President announced an R100-R200 billion credit guarantee in April and this is not a grant. Mr Momoniat noted that Banks are putting their balance sheets at risk for their clients, it is not government money and that the National Treasury (the Treasury) has presented details to Parliament via the Standing Committee on Finance. This scheme had to be implementable quickly after lockdown, so it was decided that banks can reach small businesses quickly and know their customers best. The government wanted them to lend beyond what they would normally do to ensure companies could survive the lockdown, pay their salaries, etcetera, to maintain the productive capacity of the economy. A small business applies to its bank, and then the bank considers the loan. He argued that one does not want the banks to be reckless, so the banks could take the first loss. Financial sector stability is an important objective, and the Treasury does not want banks to fail.

Mr Momoniat said that clients apply to their banks and banks use their funds. Should there be significant defaults from banks’ clients, the guarantee will back the losses as follows;

• The first loss is taken by the lending bank – 205 basis points on each C19 LGS loan;
• The second loss is indirectly taken by the lending bank – there is a guarantee fee with the South African Reserve Bank (SARB) of 50 basis points;
• The third loss is also for the lending bank to a maximum of 6% of the C19 LGS loans; and
• The fourth loss is the guarantee provided.

 Due to client confidentiality, banks cannot report on individual clients to any third party, the government, NEDLAC, and Parliament. Aggregated reporting through the BASA (Banking Association of South Africa) reporting every two weeks was established. In other jurisdictions, SA compares favorably to others and in relative terms, we have one of the largest schemes and never expected the entire scheme to be utilised. Phase 1 for SMMEs was launched 4 May 2020 with R100 billion available through commercial banks and Phase 2 was launched 27 July 2020.

As of 23 August, 2020 R13, 39 billion in LGS loans were extended to 9,125 businesses. The aggregate value of loans affected by the restructuring is R540 billion, which is additional relief provided by the banks to individuals and businesses. Over 84% of individuals and 95% of businesses who approached their respective banks for relief received assistance. Banks can provide details on relief and loans granted to their affected customers. The average loan size is R1, 2 million and the loans are going to small businesses. As at 15 August 2020 participating banks had received 40 292 applications and 24% have been approved by banks and taken-up by businesses while 39% are in the process of being assessed, 9% were rejected since they did not meet the eligibility criteria for the loan as set out by the Treasury and the South African Reserve Bank (SARB). 25% were declined because they did not meet the banks' risk criteria. However, demand for Covid-19 loans is expected to peak soon due to the prevailing business and economic conditions.

Take-up has been lower than expected at 23, 11% with small businesses reluctant to take on more debt given the uncertainty in their income stream under COVID-19. However, the recently announced move to level 2 would support the re-opening of significant parts of the economy and with this in mind; changes have been made to the design of the loan guarantee scheme. These include a Business Restart Loan and changes to credit assessment criteria. The National Treasury and the SARB never intended for the guarantee to be called in full, and only expect it to be relatively small given the tight fiscal situation faced and the need to stabilise debt to GDP.

Briefing on the BASA (The Banking Association of South Africa) relief efforts

First Covid-19 cases were reported in March 2020. Banks requested permission from regulators to discuss industry financial relief in March 2020. Banks have volunteered cash flow relief of R32, 83 billion (from March to 15 August 2020) as follows;

• 3,14 million applications from individual consumers, 84% granted (R19,45 billion);
•  141 003 applications from commercial, small, medium enterprises, 95% (R13,38 billion);
• High early assistance reduced demand for the later Covid-19 Loan Guarantee Scheme

              No debt write-off and the cumulative value of installments granted a payment break (deferred);

• Fees and interest still accumulate to cover costs and depositor's interest; and
• Depositor’s funds must be recovered.

 Banks adhere strictly to National Disaster Regulations (NDR) such as:

• No evictions allowed;
• Customers have the option to return assets; and
•  Repossession is always a last resort

Sustainable relief is ongoing and in addition to Covid-19 initiatives, it is standard banking practice to assist customers and offer safety as the financial system must be protected. In terms of social responsibility, ATM and network fees were waived to reduce congestion until 01 June 2020. Operational costs must be recovered to maintain the system. The BASA made 400 000 ATMs and point of sale devices and banking infrastructure facilities available to identify beneficiaries and pay social grants including new Covid-19 grants. 3 million beneficiaries have accounts as BASA members and R243 million was donated to Covid-19 social relief efforts.

International responses include loan guarantees, grants, or a hybrid. Banks were only guaranteed R67 billion for loans to small businesses with an option to increase them to R200 billion. The guarantee is a loan that must be repaid and it is not a grant from a fund. The loan is to be used for operational expenses: salaries, rent. Risk-sharing mechanisms balance business support with the safety of banks. First losses offset against margins on the portfolio of Covid-19 loans and losses offset against a guarantee fee are paid to the National Treasury by banks. Further losses shared were 6% absorbed by banks and net balance by the Treasury. The loan is a commercial arrangement subject to individual bank credit approvals. There is a prudential duty to lend responsibly, to protect depositors and taxpayers. Banks are not obliged to extend Covid-19 loans. Banks will not profit from Covid-19 loans. Administrative and capital costs are to be recovered. Of the R13, 39 billion in loans approved to 10 754 businesses (15 August 2020), the average value R1, 2 million, 40 292 applications received, with a potential value of R24, 4 billion, 39% in process of being assessed, 25% approved and taken-up, 9% rejected because not eligible as per Treasury and SARB eligibility criteria and 25% declined because of banks’ risk criteria.

The updated terms and conditions state that business restart loans are now available. Banks will still use reasonable lending practices to protect the fiscus but credit assessments will be less restrictive and more discretionary. The test for businesses being in good standing was moved back to 31 December 2019 from 29 February 2020, as the economic and jobs crises predates the pandemic. The uptake is slow, as business and economic conditions are dampening the demand. Further opening of the economy should stimulate demand. More debt is not always a preferred solution for businesses in distress. The state of the economy is a bigger challenge than access to finance.

Relief for eligible individuals is critical to protect the quality of life and assets. R19, 45 billion individual relief consists of payment breaks on installments for assets or loans. The combined value of the actual assets at risk is R394 billion which are:

• Home loans: R230 billion (59%)
•  Vehicles: R93 billion (24%)
•  Unsecured credit R69.35 (17%) (credit cards, personal loans)

The SARB interest cuts provide further relief to consumers but this excludes debt restructuring that is part of usual business practice.

Relief for eligible businesses is critical to protect jobs and the economic capacity necessary for recovery. R13, 38 billion business relief consists of cumulative installments for assets or loans been that are deferred. The combined value of the actual assets is R146 billion, including:

• Mortgages: R52, 70 billion (36%)
•  Asset finance: R47, 11 billion (32%)
•  Credit facilities: R27, 22 billion (19%)
• Term Loans: R18, 55 billion (13%)

Interest rate cuts provide further relief and exclude debt restructuring of corporate and investment banking loans and facilities.

The expectation is that demand will taper off well before R67 billion because of business and economic uncertainty. Other alternative ways to get funds and support to industries should be considered. Cash flow relief to eligible businesses and individuals is critical to preserving the quality of life, jobs, and economic capacity. Preserved economic capacity and health of the financial system will determine the speed of recovery. Separate from the guarantee scheme, banks continue to offer relief to customers in line with their capacity and risk management policies.

Discussion

Mr H Kruger (DA) asked the BASA about R243 million from the bank for Covid19 social relief. He asked if BASA could give details of how they arrived at such an amount. He noted that He has been hearing about a lot of corruption going around this relief fund and could BASA clear the air. Mr. Kruger also asked about the issues of the credit profile of the small business. He argued that most businesses had a good credit record before lockdown but since the lockdown, most have started defaulting and if the lockdown continues their credit record may continue to go bad. Mr. Kruger reiterated that since banks are still using their normal credit assessment, what the banks are going to do about the businesses whose credit records used to be good before Covid19.

In response, the BASA said that banks spend about R500million every year in social responsibility initiatives. It is something banks do every year and the R243 million must be seen in that context. BASA argued that this is money that banks had to redirect in response to a crisis, so they have structures in place to fulfil this mandate. The R243 million supported various activities that range from initial stages of food distribution, contributions to the solidarity fund, PPE procurement, and supporting research units on the virus. The BASA argued that the fund did not only support small businesses.

Mr Z Mbhele (DA) appreciated the BASA and the National Treasury on how they have responded to the crisis. He noted however that the problem is that even under the crisis the approach by the banks has been business as usual as the banks continued to use conventional approaches during unusual times.

Mr Mbhele argued that one hoped the response or approach to the loan guarantee scheme would put into consideration the crisis and not follow the normal approach - a concern also raised by Ms Mathulelwa (EFF). He argued that the scheme was not designed to ameliorate the circumstances of small businesses. Mr. Mbhele asked The National Treasury and BASA to give key lessons that they could have observed and learnt from the experiences and process of the last couple of months that could have helped things to run smoother. This will be useful if there is a future pandemic.

The BASA responded by saying that the key lesson they learned is that in good time one must reduce  debt so that when there is any crisis one can do a lot more during such times. Another key lesson learned is that when one had a lockdown one does not need to structure it in such a way that one brings the whole economy to a standstill. One needs to strike a balance. This was not known as impending and should not be done the next time when hit with a crisis.

Ms K Tlhomelang (ANC) asked the BASA how many businesses have benefited from the loan scheme, how many have applied for the loan scheme, how many got the loan scheme, and how many got declined. She also asked if those who got declined were allowed to reapply if they corrected what could have made them get declined in the first place.

BASA responded and said those who were declined, were declined as a result of submitting applications that were not related to Covid-19. The BASA argued that these applications to them looked like business as usual and as a result they got declined as the scheme was purely created for Covid-19. In the first phase, the criteria were business with below R300 million, and any business above that threshold was rejected but that has been changed in the second phase. Other reasons for declining were the lack of audited statements but with phase two in motion that criteria has been relaxed to allow those who want to reapply to reapply. Furthermore, the BASA said that so many applications did not demonstrate that they will be going to pay their employee and because of that they were rejected as the BASA’s biggest concern was to keep the economy running and not make employees suffer.

Mr T Langa (EFF) asked for the ratio of blacks who got their loans approved out of the 24% total loans approved. He also questioned the discrepancy in the percentage of loans as the BASA notes that they are 2% and the National treasury has reported that it was 3%.

The National Treasury responded by saying that the scheme is administered by BASA and that the discrepancies are as a result of the fact that the BASA continuously updates its figures as they administer these loans, and as a National Treasury they would have not received the updated figures hence the Committee should go with the BASA figures as they are accurate. The BASA weighed in and said the 2% relates to ongoing work as they are still hanging onto the 39% of those rejected and those admitted.

Mr H April (ANC) argued that the reports presented are well fabricated to cover up the incompetence of the banks in terms of their lack of commitment to rejuvenate the economy. He argued further that of the total loans they were given they only spoke of R13 billion which was very low. There is a lack of willingness from the banks - a disappointment also shared by Mr F Jacobs (ANC). One needs to ask the banks how many repositions they have made during the lockdown and why because one thought there was a moratorium and banks have not compiled.  He also asked the BASA to speak about the other economic relief measures they are rolling out and if their clients are aware of these measures - a question also echoed by Ms M Lubengo (ANC).

On the issue of reposition, the BASA noted that the (NDR) was very clear that they had to address the issue of anguish that the economy was facing so they were no repositions done, and in terms of commitment, banks committed that there would not be any reposition and that is on record and as the BASA they had complied. The National Treasury responded on the disappointment and argued that this is the greatest disaster that the country has faced in over 100 years. There is no way that any scheme that the government has was going to fully compensate people and businesses for what they would have lost. It is proposed that with Covid-19 the economy will reset and in a negative way as a lot will lose jobs, business, and etcetera. The disaster is reversing the gains made in the fight against poverty and hunger. The National Treasury said ‘Yes’, we should be disheartened that no scheme can solve this problem. This is one mechanism and it involves other people’s money which is the depositor’s money and banks are regulated and one does not want huge non-performing loans that pose a big financial risk. ‘Yes, banks provide for losses but we do not allow banks to just have an optimistic view but a realistic view of the world when they provision for losses’. The National treasury reiterated that the expectation that banks are going to be charitable and they have been charitable as they can but there is no replacement for what the state should be doing. The National Treasury noted that the country is experiencing this problem because of state looting that is taking place and one must deal with that decisively. Treasury noted that the looting in 2009 has placed the nation in this quagmire. Touching on the issue of whether clients ‘are aware’; the BASA said they do adverts on all banks and also advertise the criteria they will use to assist.

Mr F Jacobs (ANC) registered his disappointment in the National Treasury to disburse the loans to the people. He noted that only 7% of the loan scheme has reached the people yet people are suffering as a result of the pandemic. He argued that the banks and the Treasury should ‘go back to the drawing board’ as we cannot have the government give a loan scheme and banks do not make any effort to see that everyone receives the loan. Banks should make the economy work. The same sentiments were echoed by Mr M Hendricks (Aljama'ah) who argued that it should be made clear that the banks have let the nation down.

In response, the BASA said that the banks cannot lend if businesses do not borrow and what one was seeing with 40 thousand applications that were received so all the information presented related to the 40 thousand applications. In terms of those that did not apply, they would like to share that the opportunity to apply still exists because the country was now in phase 2 which seeks to reboot the economy.

Ms B Mathulelwa (EFF) asked for details of the region like the name of the business and the owner of a business who received the social responsibility fund.

In response, the BASA said when they first set up the scheme, they wanted to make sure that they hit the ground running and some of the data asked for was not collected initially. Now that things are settling, they are now collecting that data and in due course they will be able to give a detailed breakdown in terms of the requested group.

The Chairperson asked the BASA to unpack the proposals it had mentioned in the presentation and highlight when it would happen.

The BASA argued that they proposed that the loan scheme cannot solve all problems of the economy. There has to be a joint effort with everyone and that is why the Bank’s Association was sitting with the team that the President has put together to look at the recovery of the economy and that they have proposed to change the model so that it incorporates both equity and debt. The BASA responded and said that what else is available speaks of equity and the ability of other players to be part of the solution. The BASA argued that in its submission they are not taking what the development financiers can do but they have also included the Industrial Development Cooperation (IDC), the Development Bank of South Africa (DBSA), The Land Bank and other entities that reported to the Small Business Development Board such as the Small Enterprise Finance Agency (SEFA) who have better instruments with regard to equity participation like grant disbursement. The BASA reiterated that if there is a national dialogue that includes other measures they will participate and ‘yes’ they did have the capacity to disburse funds. The association argued that all they have designed is aimed at exposing the fiscus further. The ratio that SA has on debt to GDP is so much higher that as BASA they would not be doing the nation any favor if they do not put the fiscus first. The BASA argued that they are happy that banks have preserved the fiscus.

The Chairperson thanked the two entities for coming and said that ‘yes’, the loan scheme cannot solve all problems and that there was a need to invite other players to the meeting.

Briefing on the Sukuma Relief Programme

Mr David Morobe, Executive General Manager, gave the presentation. He argued that Worldwide, the Covid-19 pandemic left small and medium enterprises with an uncertain future. Here in SA, the SMMEs already faced:

– A low growth environment;

 – A technical recession, and

 – A ratings downgrade to sub-investment grade by Moody’s

The lockdown economy was devastating to South African small businesses. The Sukuma Relief Programme was founded with a R1 billion donation by the Rupert family and Remgro Limited to help small businesses in South Africa survive a devastating economic crisis due to the COVID-19 pandemic. In addition to the R1 billion from the Rupert Family and Remgro Ltd, a further R35 million has been received from several independent donors. The Sukuma Relief Programme funding is administered for no fee by Business Partners Limited. The Sukuma Fund is a rescue mission for small businesses in crisis. Similar to the well-established traditions of other rescue organisations, like the Red Cross, the Sukuma Relief Programme is focused on crisis relief work. It comes to the aid of small businesses when there is a crisis of survival due to circumstances beyond their control.

The relief takes the form of an immediate non-repayable R25 000 survival grant to all small businesses that qualify. Soft loans are offered to qualifying SMMEs ranging from R250 000 to R1 million. The loans bear no interest charges nor do they require the repayment of capital for the first 12 months. Thereafter, interest is charged at the prime rate, lower than what businesses would pay for commercial loans. The repayments of these soft loans are structured over four years so that businesses that manage to recover from the pandemic will provide funds for future crisis funding of SMMEs in South Africa. As a relief programme, The Sukuma Relief Programme adheres to principles common to other relief organisations which are:

1. Humanity - a spirit of compassion, recognising that small businesses are the creations of people;

2. Impartiality - Sukuma stands on the side of small businesses with fairness and equal treatment;

3. Independence - respond to the needs of small businesses in distress by its lights and vision;

4. Unity - strive for the cohesion of purpose and a spirit of partnership in conducting relief work; and

5. Neutrality – objectivity and a focus solely on the relief for small businesses in distress.

As of 17 August 2020, has allocated 3 432 survival grants to 2 208 sole proprietors and 1 224 SMMEs.  This represents a total value of R85 800 000 which is broken down as follows:

– R55 200 000 to sole proprietors, and

– R30 600 000 to SMMEs.

They have approved 1 224 soft loans to SMMEs. These have a combined value of R680 912 000.  A total of 3432 small businesses have been assisted in the amount of R766, 7 million comprising sole proprietors and SMMEs. The location of the applicants to a large extent tracked the distribution of GDP across the country. Applications are across all sectors of the economy and incredibly diverse. Women comprised 40% of the applications. So far, 31 000 jobs have been saved and these jobs provide an income that supports an estimated 155 000 people.

Independent outspoken public figures as an advisory panel of experts advise the Sukuma Relief Programme. They offer moral and practical leadership and support the aims and principles of the organisation.  They reach out to industry bodies and membership organisations including:

– The Black Business Council

 – NAFCOC

 – IDF Capital

Key considerations are that the fund will be fully committed by September and research has been commissioned to gauge and inform the next steps. The Sukuma Relief Programme seeks to formalise learnings and shape how to handle future crises and it considers mobilising further capital through a donor drive.

Discussion 

Mr Jacobs welcomed the initiative that The Sukuma Relief Programme was doing. He however noted that the problem is on the recipients or beneficiaries who remain largely white. Mr Jacobs said that one needs to see how the marginalised can be helped and how private organisations can be roped into government programs that seek to help the marginalised. He argued that the Sukuma Relief Programme needs to be progressive and address the racial past and seek to heal the past. He further reiterated that the Sukuma Relief Programme should target women businesses in the rural and township economy and also the youth. Mr Jacobs also challenged the organisations to make use of ICT to make their programs accessible by anyone anywhere in the country as the new normal demanded that.

The Sukuma Relief Programme responded and said that since inception they have been grappling with this issue. They indicated that it is a sign of the country’s economic environment that is not inclusive and the demographics they presented are those they received and they had to accept it. After seeing such demographics, they said they are now looking at a criterion and trying to find out ways that can address such issues. ICT Sukuma said it is an area they are developing, and they are making serious efforts to make sure most of its initiatives can be accessed online.

Mr Mbhele echoed the sentiments of Mr Jacobs. He also asked about equity financing. If there is role equity financing has played in this particular instance or if they might foresee it being harnessed in the future.

The Sukuma Relief Programme said that the issue of equity financing is very valid especially if the country looks forward to seeing businesses being restarted. It argued that what they have seen is that there is a need for new relief so that businesses can be boosted. It is important to investigate and see if a combined model of debt and equity can work.

Ms Tlhomelang asked which communities or areas have the Sukuma Relief Programme assisted.

The Sukuma Relief Programme responded and said they assisted in areas where they had systems so that they could be able to deliver without facing any problem.

The Chairperson argued that as a Committee they should be looking at how best they can include the Sukuma Relief Programme and other entities such as SEFA and the Small Enterprise Development Agency (SEDA). She noted that as a Committee they should recommend that the Sukuma Relief Programme is engaged in assisting communities.

The Small Enterprise Foundation (SEF)

John De Wit, Co-Founder and Managing Director of the SEF, presented and started by saying that the SEF was a not-for-profit NGO whose aim of poverty alleviation was through micro-enterprises. It was founded in 1991 and it was inspired by the approach of the Grameen Bank of Bangladesh. It has 216 000 active clients, 950 staff and has disbursed over R2 billion a year in loans since inception which amounted to R11 billion, with R4 million in loans since inception, with R 641 million and client savings R138 million.

The SEF works by making clients form groups of five. Each client receives their loan for their own business. All group members guarantee each other’s loans. Groups meet twice a month in centres of about eight groups meeting at a time. The foundation’s strong focus is on reaching not only the poor but the very poor (those in the bottom half of poverty). They use different poverty assessment tools.

Its pre-COVID performance was as follows;

• Portfolio at risk:   0.4%
• Loan losses since inception:   0.22%

The SEF has a strong focus on social performance.70% of clients are in business. Social performance is built into staff incentives. The SEF has achieved a very strong Alpha+ social rating from the independent rating firm MCRIL – one of only a few to attain such a rating world-wide.

The SEF on its experience working with SEFA said that it has received funding from Khula, SAMAF, and SEFA and currently has a revolving loan facility of R60 million with SEFA. The SEF very much appreciates reasonable interest rates – prime less 3%. They, however, have challenges working with SEFA which are;

• Staff are dedicated but not well versed in micro-finance;
• Junior staff can undermine the experience due to poor capacity – results in SEFA having an unreliable reputation; and
• Very likely that the board does not have sufficient members with an understanding of microfinance.

 Discussion

Mr Mbhele said that he is pleased to learn about the SEF and they work they do with small businesses especially in the area of microfinancing. He argued that one cannot shutdown other businesses of noncompliance while they are boosting the economy, but as a Committee, they need to protect sole proprietors and do not leave them falling prey to a misguided witch hunts.

Mr Jacobs added his voice and said the work done by the SEF is amazing especially in microfinancing and if they work with other government established financiers it will be better. He argued that as a Committee they must protect small businesses and sole proprietors and requested that as a Committee they have a separate meeting dedicated to microfinancing alone.

The Chairperson weighed in and said that the work that the SEF is doing on the ground is excellent and they are helping communities and the work they are doing will support a lot of people in the country.

Ms Mathulelwa added her voice and said she appreciated the work they do but however asked the SEF where their offices are so that they can be able to refer people there. This question was also asked by Prof C Msimang (IFP)

The SEF responded and said they do have over 100 branches across the country and in rural areas, but they do not encourage people to come as the offices are very small and only for administration purposes. The SEF noted that they meet their people in communities and they serve over five thousand communities and they do so to avoid making their people travel long distances to seek their services.

Prof C Msimang (IFP) commended the foundation for being able to take a risk where banks are letting the nation down. He argued that there is a lot of red tape going on and this pushes the informal business people to ignore compliance. He reiterated that there is a need for the South Africa Revenue Service (SARS) to allow informal traders to trade while they work on getting themselves established formally. He urged that as the Committee they should help where they can so that people are not hindered by the red tape. Also, he noted that he is concerned with the fact that the relationship between SEF and SEFA is not good and that as a Committee they should work on seeing why the relationship is not harmonious and the steps they can take to rectify it.

Mr Langa also praised the SEF and said they indeed seek to assist our people on the ground and unlike Sukuma, which is selective; the SEF needs the Committee’s support.

Mr Hendricks asked how much interest rates the SEF are charging.

The SEF noted that they charge 10% interest for every R1000 they lend. The SEF reiterated that they would want the rate to reduce but the cost they incur in travelling in communities is too much and it needs a lot of money.

The SEF said they appreciated and are encouraged by the comments from the Committee and are happy to work further with the Committee in making the Committee understand microfinancing. The SEF urged the Committee to also work and engage with its association.

The Chairperson thanked the SEF for the presentation and hoped that after the lockdown they will be able to meet with them in person and engage more.

The meeting was adjourned.