South Africa will cap losses for banks participating in its R200 billion loan-guarantee programme as the government seeks to rekindle the economy devastated by the lockdown to curb the coronavirus.

Lenders, the National Treasury and the SA Reserve Bank have created a credit-guarantee programme 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, 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 R24 billion over five years for banks and the government, he said.

The initial phase of the project will target R100 billion of loans that will be offered at a single interest rate that still needs to be determined, and pegged to the SARB’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 R500 billion 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 programme:

  • 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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