As a result of the novel coronavirus and the steps taken to curb its spread, many businesses face a significant loss of income.
In this context, the South African government is partnering with commercial banks to provide financial support to small and medium-sized firms to enable them to meet their operational needs over the next few months.
Absa, First National Bank, Investec, Mercantile Bank, Nedbank and Standard Bank are ready to accept loan applications from eligible businesses which bank with them, the National Treasury announced on Tuesday.
On 4 May 2020, the National Treasury, South African Reserve Bank and Banking Association South Africa agreed on the detailed design, legal agreements and administrative processes to implement the loan guarantee scheme announced by President Ramaphosa on 20 April 2020.
The COVID-19 loan guarantee scheme is an initiative to provide loans, guaranteed by the government, to businesses with an annual turnover of less than R300 million to meet some of their operational expenses.
Government and commercial banks share the risks of these loans.
The National Treasury provided guarantee of R100 billion to the scheme, with the option to increase the warranty to R200 billion if necessary and if the programme is deemed successful
The Reserve Bank will lend money to commercial banks at the repo rate (currently 4.25 per cent) plus a 0.5 per cent guarantee fee.
Banks will lend this money to small and medium-sized businesses at the repo rate plus a fixed spread of 3.5 per cent (currently 7.75 per cent, equal to the prime lending rate).
The activation of the loan guarantee scheme follows the finalisation of legal details by the National Treasury, the South African Reserve Bank and the Banking Association South Africa.
“The loan can only be used for operational expenditure such as salaries, rent, utilities and ordinary-course supplier payments. Businesses may not use these loans to pay dividends, make investments, pay bonuses or pay off other loans that the business may have,” said Treasury.
Eligible businesses should contact their primary or principal banker.
“The loan guarantee scheme is intended to help small and medium-sized businesses. While these arrangements are designed to encourage banks to lend more than they would otherwise lend, banks are expected to make sound lending decisions and avoid reckless lending,” said Treasury.
“The intention is not for banks to make a profit from these loans. Any net profits will be pooled to offset losses in the scheme, so as to minimise total losses to South African taxpayers.”
If a business that has taken a loan goes into liquidation, the COVID-19 loan is treated as equity and therefore ranks behind other creditors, said Treasury.