President is wrong to chide banks for not rolling out R200bn-worth of loans.

This column was first published in Business Day.

The president is upset that banks have not rolled out R200bn-worth of loans in the loan guarantee scheme. The scheme formed a big part of the R500bn Covid-19 economic response and the president’s critics have lambasted him for the shortfall in delivery. Only about R18bn has been lent.

According to reports, last week the president told a masterclass arranged by the National School of Government that the “disappointment, for me, has been in how our financial sector has managed the Covid guarantee fund that we put up, which was guaranteed by government … we put up R200bn and we said ‘assist the private sector and let’s protect the jobs so that companies are able to operate through Covid’”.

He slated the banks for being monopolised and “the profits that our financial sector has been making have been huge … and quite a lot of that money is … not in assets that we would like to see producing jobs”. These comments are misguided.

The context might have played into his remarks — it was an event headlined by Mariana Mazzucato, an international economist who persuasively argues the state creates more economic value than it is given credit for. She is now a special adviser to the government and her writing is leapt on by those who want the state to be the primary driver of economic activity. That is an atmosphere in which it is easy to bash the private sector and talk up the state.

Let’s start with his last point on banks’ assets. I wrote in my previous column that during the Covid-19 crisis there has been an astounding 32% growth in banks’ holdings of government bonds. I agree with the president we would rather have banks lending to the real economy and financing growth that would create jobs. But it is the government itself that is crowding out private lending by bidding up the cost of funding. It is redirecting funding away from the real economy and into financing the government’s deficits.

Next, I would call bank profit levels dismal rather than “huge”. Banks’ profits fell 58% last year. Their return on equity was 6.93%, less than shareholders could earn by putting their capital into government bonds. No company would be able to survive by offering shareholders lower returns than government bonds.

But let’s talk about the R200bn loan scheme. First, I must point to my own interest here. Together with colleagues at Intellidex I developed a proposal for the scheme that influenced its design. We have subsequently written several papers on how to improve its functioning.

Let us be clear about how the scheme works. The R200bn was not “put up” by the government, which implies there was a budget allocation of R200bn. In fact, the biggest problem for the scheme is that the government put up exactly zero to fund it. It was deliberately shaped to almost eliminate the probability that it would cost the government a cent.

At the start of the Covid-19 crisis the problem was that banks faced a huge credit shock. Their normal reaction would be to become more conservative given that their capital might be at risk if default levels spiked. There was also a risk of a liquidity crisis had the financial markets panicked. The scheme helped deal with these issues by giving banks a line of liquidity outside their existing funding and then a guarantee that effectively put a ceiling on the amount banks could lose from new loans (of 6% plus 2% per year). This protected the economy from a collapse of bank lending if the Covid crisis turned into a financial crisis.

There were problems with the scheme design at the outset that limited its appeal, such as requiring borrowers to put up personal surety, restrictions on the use of proceeds and the fact the scheme only kicked off more than six weeks into the lockdown.

But the biggest factor was that the financial impact of the pandemic was not as bad as worst-case scenarios suggested. There was no liquidity crisis — in fact, the opposite as bank clients ramped up cash holdings. Credit performance has also been relatively benign, with bad debt levels not reaching those of the 2009 recession. As a result, it didn’t make sense for the banks to use the scheme (which costs them a fee to access) when they were in a position to continue lending through the “normal” channels they ordinarily use.

I don’t see that as a failure. It is a good thing that the economic impact of the pandemic has been limited and our financial system is not in the state of crisis that would lead to the R200bn loan scheme being used. It is like an insurance policy we haven’t needed to claim on. This has also been the experience of many other countries who created similar schemes.

The president should be talking up the positives of the scheme in successfully protecting the economy from a serious risk in this way. It is not a failure.