The National Treasury, the South African Reserve Bank (SARB) and the Banking Association South Africa (arrangers) launched the Loan Guarantee Scheme (the scheme) on 12 May 2020, which made a maximum of R200 billion available for eligible businesses. The scheme was established to support small businesses that were experiencing financial distress because of the COVID-19 pandemic by providing them liquidity for their operating expenses, writes Thakhani Masindi, SAICA Project Manager for Members in Business Technical.
Per the scheme, qualifying companies receive loans from participating banks with interest charged at the prime lending rate. The loans still go through the individual banks’ loan approval procedures and the banks must be satisfied that the operations of the applicant have suffered due to the pandemic and not any other factors. The arrangers have now agreed to extend the period for draw down of loans by three months, from 11 April 2021 to 11 July 2021.
The design of the scheme has been done in such a way that credit risk is shared between the government and participating banks at 94% and 6% respectively. The SARB has provided the funding to participating banks at the repo rate but bears no credit risk in the scheme as the National Treasury guarantees those loans. The banks pay a credit loss protection premium to the SARB.
The loans are intended for businesses whose operations were directly or indirectly affected by the pandemic. As of 27 March 2021, banks had approved loans to the value of R18,16 billion, 9% of the fund. This may create the perception that the scheme has failed, as some news headlines suggest. The arrangers of the schemes have said that many distressed businesses have been reluctant to assume more debt. Their reluctance is likely pointing to the success of other relief and support measures from banks, landlords and regulators including internal measures such as layoffs, remote working to avoid rental expenses and downsizing. Most companies have also been conservative with short-term incentives and payment of dividends due to uncertainty about the future.
According to the structure of the scheme, the banks are exposed to a maximum of 6% credit loss due to the guarantee received from the SARB. As part of the contractual arrangements entered into by the banks with the SARB in order to provide finance under the scheme, the SARB has requested that the calculations, as signed off by the banks in the contract and included in the appendix to the agreement, are “audited” by the external auditors and a report thereon is provided to the SARB. Audit requirements for the scheme have not yet been made clear but the SARB is expected to engage the industry on this matter, whether reasonable or limited assurance will be required, including the reports the SARB will expect from auditors of banks. SAICA has through its Banking Project Group subcommittee made a submission to the IRBA to assist with procedures that can be performed in auditing these schemes.
The scheme is comparable to similar programmes in Europe, Asia, USA, Canada etc. such as the Coronavirus Business Interruption Loan Scheme in the UK. Other schemes are intended for specific industries or specific sized companies.
There are various perspectives on the scheme, with some of the opinion that it failed, some saying it must be converted to a grant, while others believe the structure of the scheme could be changed to improve its effectiveness. Nonetheless, the scheme is a commendable effort to assist businesses during the pandemic, especially coupled with other initiatives and support measures that have been made available by regulators and financial institutions.