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Covid-19 loan guarantee scheme to ‘oil’ SA economy – Mboweni

National Treasury will work with banking industry to roll out landmark plan.
Image: Reuters/Mike Hutchings

The government-backed R200 billion Covid-19 loan guarantee scheme to support small and medium businesses, announced by President Cyril Ramaphosa on Tuesday night as part of a wider R500 billion social relief and economic stimulus package, will be ready for launched as early as next week.

That’s the word from Finance Minister Tito Mboweni, who briefed the media on Friday with more details on the total package, which represent government’s response to the economic fallout from the pandemic.

Read:

Ramaphosa’s R500bn Covid-19 relief and stimulus response

Covid-19: Freeze dividends and exec bonuses, Sarb tells bankers

Responding to questions around the loan guarantee scheme, Mboweni said that National Treasury would be working with the private sector (essentially banks), together with the South African Reserve Bank (Sarb), to unlock between R100 billion to R200 billion through a national credit guarantee scheme.

“The scheme would function, in particular, to favour those businesses with turnover of R300 million or less. That’s very important because it doesn’t mean these are funds are in the hands of the fiscus, but this will be funding in the economic system, which should help keep oiling the functioning of the economy system,” he said.

“It is very important in that we are not statist in our approach, but we bring together the public and private sector,” he added.

“The profits and losses on that guarantee scheme will revert back to the national revenue fund. But we have to take a positive approach, and not only look at the losses,” noted Mboweni, adding that there were also benefits that would accrue to the economy.

Credit guarantee schemes have historically not been significantly used by government to support business in the South African market, barring government bailouts of parastatals like SAA and Eskom. However, there are much smaller credit guarantee initiatives offered by state driven small business support institutions such as the Small Enterprise Finance Agency.

Read: How loan insurance can boost the economy

Listen: The benefits of credit guarantee schemes

Such schemes are quite popular in other developing nations such as India, which are used by governments to support banks in de-risking funding to small and medium businesses. The R200 billion Covid-19 loan guarantee scheme may yet be the biggest such initiative to be launched by government.

During his address on Tuesday night, Ramaphosa noted that the loan guarantee scheme would assist enterprises that have been hard-hit by the Covid-19 economic fallout with funding to pay operational costs, such as salaries, rent and the payment of suppliers.

“It is expected that the scheme will support over 700 000 firms and more than 3 million employees through this difficult period. A number of the banks are ready to roll out the product before the end of the month,” said Ramaphosa.

Meanwhile, the National Treasury published a leaflet and posted details on its website related to how businesses can access funding from the Covid-19 loan guarantee scheme.

“In terms of this scheme, R200 billion will be ultimately made available for new loans to existing customers. The initial phase will be R100 billion,” it noted.

Listed below are the key features of the Covid-19 loan guarantee scheme

  • Covid-19 loans will be available from banks to eligible businesses in good standing with their commercial banks with an annual turnover of less than R300 million
  • Funds borrowed through this scheme can be used for operational expenses such as salaries, rent and lease agreements, contracts with suppliers, etc. Loans will cover up to three months of operational costs and will be drawn down monthly.
  • Banks are not obliged to extend Covid-19 loans, and those that do will use their normal risk evaluation and credit-application processes. A business’s owners may be required to sign surety for the loan
  • Each business may accept only one Covid-19 loan
  • Covid-19 loans will be offered at a single, agreed lending rate by all banks participating in the scheme. The rate will track the repo rate
  • A six-month repayment holiday will commence from the first drawdown, although interest will accumulate from the date on which the first drawdown on the loan occurs
  • Repayment of interest and capital starts after six months and businesses have a maximum of 60 months to do so. Borrowers can repay the loan ahead of schedule
  • The scheme will be rolled out by banks over the next few weeks.

The Treasury noted in its Covid-19 loan guarantee scheme leaflet that the scheme works on the principle that profits and losses are ultimately shared between government and the banks.

“This will include a guarantee fee charged to the banks in relation to the scheme. These profits will be used to offset any losses that the scheme makes. If the scheme suffers any further losses, these will be absorbed by the banks themselves, capped at 6% of the size of the loan,” it added.

“Any further losses will ultimately be covered by the fiscus,” it said.

The Treasury said that interested businesses should contact banks directly for more details and eligibility criteria.

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I don’t know about this. Why would government think that only distressed businesses need assistance? What about the businesses that lost money, but aren’t distressed to the point of closing down? This approach will be giving money to businesses that aren’t going to make it in any case. Furthermore, it’s not a long term solution, but rather an attempt to allow salaries to be paid for 6 to 12 months – in other words, another grant – but done in such a way that the business owner signs surety. Government will be loath to allow the guarantee to ever kick in, so the business owner will be stuck with all the risk and the debt, but government will gladly accept the applause. It might seem like easy money, but it will eventually eat you up. I wouldn’t touch this with a barge pole.

I hope that racist criteria are not used in determining eligibility. Given the ANC’s track record I am not hopeful.

Don’t you worry – racist criteria most definitely are being applied.

Note:

40% of tax paid by personal income tax.

R500bil x 0.4 /~3 mil taxpayers = R67,000 per person.

Feels great to know government has sent us all a tab of R67k and we didn’t have a say in it.

What’s the point of democracy when you’ve got a bill of rights, freedom of speech but can’t stop your government from borrowing endlessly and sending you the bill + debasing your currency and wealth away?

And then they smugly call it “oiling” in the economy.

Great. So I borrow money to pay operating costs to keep my business running while there’s zero turnover. Three months worth.

But I’m only allowed back in business after level 1 which will be when? Exactly?

Could be a year. Two years given our disregard for keeping the economy open.

Meantime I’m in hock to the banks who are now coming after my house and private assets.

And this wonderful scheme will keep our economy oiled and pumping while we twiddle our thumbs at home. The businesses out there must be a lot stupider than I imagined to go for this.

Don’t think so. After all they haven’t gone for the mining charter by opening up mines left right and centre with a 30% giveaway – can’t see them going for this either.

The photo illustrating the article is brilliant

He got his metaphor wrong…the loans are much more likely to grease the connected elite’s palms…

This is a transaction, not an aid package. You get an amount of cash in return for surety. You use that cash to pay salaries to people who have been banned from the workplace, by the government, plus you pay the interest on the loan. The government facilitates this process through a guarantee scheme.

So, by implementing this process, the government increases my risk and costs structure, to motivate me to solve the government’s unemployment problems. In effect, I am taking some part of my equity to pay workers who are not working. This sounds like expropriation without compensation to me.

Wouldn’t it be cheaper, less risky and more efficient to simply sell the assets that I would have given as surety, sack the workers, save the interest, and live off the capital myself, instead of giving it to the workers? No further risk for me, no payments to the bank and no risks of future lockdowns.

Since lockdown is forcing me to reconsider my business strategy anyway, why don’t I liquidate my whole business and move to a jurisdiction where I am allowed to exercise, walk my dog and to buy good red wine and warm food when I want to?

I think this government guarantee is just a roundabout way of government abusing me in the process to guarantee its own support from the labour unions.

Strange, but I would have thought that the government would recommend that business owners claim under their business interruption cover from their short term insurers.

My understanding is that business interruption cover, covers business owners for loss of profits as well as other sunk operating costs such as rental, debt repayments as well as any staff training costs to replace lost staff all resulting due to the business interruption.

By most policy definitions a business interruption includes events such as government curfews and lockdowns. This liquidity provision is probably under the assumption that most businesses have comprehensive business insurance and that they will claim at a later date to repay the liquidity.

Always enjoy your comments Sensei as you make total sense and leave logical rational statements.
Just don’t understand why most don’t get this but rather follow like sheep and fall for this Cadre elite’s smoke and mirrors…
This article header should read “Covid-19 loan guarantee scheme to ‘soil’ SA economy”.

More likely to ‘oil’ ANC bank accounts in Dubai.

Like VBS we will be surprised at the depths that they will stoop to. Another new low for the collective.

The trick is to loot with a mate, never on your own then it was the collective again.

End of comments.

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