The state has given nod for easier credit criteria, but is a 6% writeoff a price worth paying for banks?

This column was first published in Business Day. 

It should now be much easier for businesses to borrow from banks in terms of the Covid-19 guaranteed bank loan scheme, thanks to changes made last week. But this depends on whether banks play their part in pushing R200bn of loans into the economy.

The scheme has been a disappointment so far — according to most recent figures, just R11.7bn has been lent and the growth rate was slowing. The scheme is a big part of the president’s R500bn economic relief package. Now, the conditions on which loans will be granted, as well as the credit assessments banks must undertake, have been loosened. Banks have been given discretion to apply liberal credit criteria.

The problem is that it is still not clear how much the National Treasury is going to absorb in losses for the scheme. This is fundamental — a specific budget should be set as a target. The scheme should be about leveraging a budget set aside for stimulus into a large amount of funding for the economy.

Instead, loosened criteria will mean more losses for the Treasury but we don’t know what would be reasonable. It has hinted it is lining up external funding to cover losses on the second half of the R200bn, which might fix this issue, if we ever get the volumes out the door to reach that point.

A lot will depend on how banks exercise their discretion and whether they actively market the loans. One of the weaknesses of the initial scheme was that banks were required to apply their “normal” credit assessments. So even though the Reserve Bank, guaranteed by the Treasury, would absorb 94% of the defaults on loans (less any margin banks earn) the banks couldn’t loosen their risk appetite.

If they did, their claims in terms of the scheme could be rejected. That has now changed — the wording is now about “reasonable” credit process in line with the “emergency spirit” of the scheme. There is a suitable level of vagueness to cover banks who take a liberal approach to granting the loans.

But just how liberal will they be? If banks wanted, they could grant loans based on assessment of the applicants’ performance up to the end of 2019 (previously they had to consider performance up to March 2020) looking only at bank accounts to assess whether they were in good standing (previously they had to use audited financials). They can then make the loans and require no personal suretyship from the owners of companies that borrow (previously they had to get suretyship).

Now, if banks choose, company owners would not have to face putting their homes and families’ livelihoods on the line to access the scheme. Company owners can also now pay themselves if their remuneration is normally in the form of dividends.

The incentives for banks are tricky. They still face writing off the first 6% of any loans that are made. That is R12bn of losses across the industry if the full R200bn is lent, though potentially spread over several years (there are tricky accounting issues around this). They must also use any margin they earn on the loans to cover further losses before they can claim on the guarantee. So, the scheme is not intended or likely to be profitable. The discretion granted to banks is in recognition of the financial risks they still face and in equipping them to manage those.

But there is an indirect way the banks benefit from the scheme. The guaranteed loans rank behind all other creditors. If a borrower goes bust, the Covid-19 loans rank alongside equity. So, if a bank has an existing loan to a client, the guaranteed loan provides a new buffer to help the client continue servicing the existing loan.

Wider stimulus

This, I think, is the main incentive for banks to lend in the scheme, but that depends on them applying liberal criteria, and it drives them to focus on clients in their existing books. They could also package Covid-19 loans with other senior loans, improving the overall credit outlook for the bank. There is a good case for banks to look at the 6% write-off as a price worth paying to improve the performance of their core books.

The other benefit, of course, is from the wider economic stimulus of the scheme. At about 4% of GDP, it would provide material support to the recovery with wider benefits to banks and everyone else.

Loans also now can be used to finance reopening (previously it was just the overheads during lockdown). This is important. Imagine a restaurant that has the option to reconfigure its layout to offer more outside seating space and put in other social-distancing measures but has spent down the financial resources it would need to do so. Now it can access the cash to finance its recovery.

The terms of the loans have also been somewhat loosened — borrowers don’t have to start making repayments for six months after the last drawdown (up from three months), so up to one year from the loan being granted. They then have five years to pay it back and the prime interest rate is charged (now at a historic low of 7%).

Of course, more could be done. Rates could be reduced, the use of proceeds could be widened, and the cash flows could be made up front. But this is a material step in the right direction. Other countries have calibrated their guarantee schemes to get them to meet objectives. Some are more liberal than SA, but others less. We will see if the calibrations now do in fact allow the scheme to meet the targeted loan amounts, but much depends on how banks rise to the occasion.

• Theobald is chair of Intellidex, which produced an initial design for the bank guarantee scheme.