Govt’s loan guarantee scheme ‘not working, needs SMME funders’

Government needs to let funders who are more experienced in giving credit to small businesses participate in the Covid-19 loan guarantee scheme if it is serious about saving jobs, some business leaders have said.

Last week the Banking Association of South Africa (BASA) said so far, commercial banks have extended around R10.6 billion of these government-guaranteed loans to distressed businesses as part of the scheme.

BASA said part of the reason why uptake of the loan guarantee scheme has been low is because by the time it kicked in in May, banks had already voluntarily begun restructuring their loans to SMEs.

However, businesses on the verge of shutting their doors say this is not the case. Demand is there – but just not met by banks, due to stringent qualifying criteria.

A survey done by the Southern African Private Equity and Venture Capital Association (SAVCA) among its members recently found that only 28% of those who applied for funding got the loans and drew down on a facility. SAVCA said many did not even apply, due to “onerous” eligibility criteria which include requirements for personal surety in some instances, and that businesses must have been profitable before the lockdown.

Of those who have not been able to access the loans, 60% anticipate they will have to start permanent retrenchments. If that’s not enough to keep them afloat, they will cut on growth expenditure and stop paying their suppliers.

“That’s going to have a knock-on effect, and we suspect there might be a second wave of economic crisis if these businesses close,” said SAVCA CEO, Tanya van Lill.

‘It’s not working’

The Black Business Council of SA (BBC) has held several meetings with National Treasury to suggest how the scheme could be made more accessible to more businesses who currently don’t meet the criteria set by commercial banks.

BBC treasurer-general, Bonolo Ramokhele said the organisation will be meeting with Treasury again on Friday. The proposals that the BBC has put on the table include letting non-bank funders that specialise in financing small, medium and micro enterprises (SMMEs) become part of the loan guarantee scheme.

Ramokhele said there are about 40 SMME financiers who can be included. The BBC also wants economically viable development finance institutions, like the Industrial Development Corporation, to be part of the scheme.

Although the scheme was initially limited to borrowing for purposes of paying rent and staff salaries, the BBC has also proposed that small businesses must be allowed to borrow so that they can buy machinery and equipment they need to produce other goods and services that are more in demand right now.

“For all intents and purposes, this is not working,” said Ramokhele.

“The banking lending sector has historically been exclusionary. It has always been pro-big business and always to the detriment of black businesses and SMEs in general, regardless of who owns it, black or white.”

BASA says changes are on the way

Approached for comment, National Treasury referred Fin24 to BASA. BASA said the first tranche of the scheme to disburse was R100 billion. Having extended just over 10% of this by the end of June, the association said the banking industry has engaged National Treasury and the SA Reserve Bank, and some of the practical administrative aspects of the loan guarantee scheme have been revised.

“We are awaiting the final announcement. However, the revised scheme may provide the banks with some flexibility in processing and assessing credit under the scheme, but it will not change the appetite of some SMEs for additional debt in these difficult times with affordability a constricting factor in uncertain economic conditions,” said BASA in a written response.

Meanwhile, the BBC has requested to be part of a steering committee that includes Treasury, BASA and the SA Reserve Bank, so that they can all monitor how quickly funds are disbursed, to whom, and which businesses, if any, are prejudiced.

“We don’t want to be bystanders anymore because it’s our businesses that are hardest hit by this Covid-19. You can’t have solutions for us, but we are not sitting at the table to say, this will or won’t work,” added Ramokhele.

Van Lill said the inclusion of SMME funders will make the scheme more accessible.

“They have the capability to lend to SMEs on scale and have a little bit of a different risk profile than banks. If I think about SAVCA membership, someone like Business Partners has the capability to do debt instruments on scale,” she said.

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