South Africa to cap losses for banks giving virus loans

South Africa will cap losses for banks participating in its 200 billion-rand ($11-billion) loan-guarantee program as the government seeks to rekindle an economy devastated by a lockdown to curb the coronavirus.

Lenders, the National Treasury and central bank have created a credit-guarantee program in which the government and banks will share profits made from the difference between the cost of funding and the rate of interest charged on loans, the Treasury said in an email on Friday. Should the gains not be enough to offset losses, these will be absorbed by banks — as much as 6% of the loan, with the government shouldering the rest.

Treasury doesn’t expect any losses under the baseline scenario, Roy Havemann, chief director of financial markets and stability, said by phone. “If things go badly,” potential losses could be as high as 24 billion rand over five years for banks and the government, he said.

The initial phase of the project will target 100 billion rand of loans that will be offered at a single interest rate that still needs to be determined, and pegged to the central bank’s benchmark rate, the Treasury said. Banks will also be charged a guarantee fee.

Stimulus

South Africa is following the lead of other nations around the world seeking to provide stimulus to their economies through their banking systems. The loan guarantees form part of President Cyril Ramaphosa’s 500 billion-rand support package aimed at rekindling growth and helping those worst affected by the lockdown.

Banks would still adhere strictly to risk principles, said Nolwandle Mthombeni, an analyst at Mergence Investment Managers. “Banks will be affected to the extent that their customers default, but even then it will be limited to 6% of loan size. I expect banks will still do what they can to assist clients.”

Other key features of the program:

  • A six-month repayment holiday will start from the first drawdown, from which interest will accumulate.
  • Repayment of interest and capital starts after six months and businesses have a maximum term of 60 months.
  • Each company may take out only one Covid-19 loan.
  • Loans will be available to businesses in good standing and with an annual income of less than 300 million rand.
  • Funds can be used for operational expenses such as salaries, rent and lease agreements, and contracts with suppliers.
  • Loans will cover as much as 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.

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South Africa to cap losses for banks giving virus loans