You may have to bet your house to get Covid-19 business loan

When President Cyril Ramaphosa announced the R500-billion coronavirus package in April, entrepreneur Ian Solomon was relieved. A big chunk of the stimulus package, the R200 billion loan guarantee scheme to help businesses hard hit by Covid-19 was supposed to help his businesses in the tourism and hospitality sector continue paying salaries to staff and other essential costs outstanding since March.

But when he approached banks, he and his fellow directors were told that they may have to provide security. In the case of FNB, which is in advanced stages of assessing his application, assets, cash investments or insurance policy equal to the value of loan sought were originally required. Now the bank is asking for joint as well as several personal sureties from all directors. 

Unreasonable risk?

“For me, that’s not in the spirit of the stimulus package that the president announced,” he said.

Betting his house or any other asset when there is uncertainty regarding when businesses in the tourism and hospitality sectors would be able generate income again seemed, to him, an unreasonable risk to take, as banks are only offering a temporary repayment holiday.

“Obviously, some tourism and hospitality businesses will close. Some will rather self-fund where possible than take a bank loan and pay interest at prime with personal sureties,” said Solomon, adding that a tailored solution is necessary for tourism and hospitality businesses to save much-needed jobs.

*John – not his real name – also feels surprised and hard done by, given the “stringent requirements” on loans that government is guaranteeing to the tune of 94{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. He said with these surety requirements in place, the stimulus is unlikely to filter into the economy at the speed is needed, and many businesses will close.

“How do you tell someone who owns a restaurant that can’t open for the next six months, someone who ran a successful restaurant before … how do you expect him to put his house on the line when they know they can’t open for the next six months?” he asked in frustration.

Treasury said the Banking Association of SA is best placed to answer about the surety requirements, while BASA pointed to the banks.

It’s a government requirement

The four banks that responded to Fin24’s questions – Absa, FNB, Standard Bank and Investec – said business owners may or may not be required to provide surety, but each case is assessed on its own merit.

Standard Bank said this was part of the agreement between all industry parties and participating banks. FNB added National Treasury requires banks to continue applying the National Credit Act practices and standard credit assessments. Only sole proprietors in good standing are exempted.

“Commercial banks and the National Treasury share the risks of the scheme. The SARB takes no financial risk as its loans to banks are guaranteed by the National Treasury. The SARB have mandated the commercial banks to maintain good lending practices,” said Jesse Weinberg, head of the SME customer segment at FNB.

FNB said it has so far disbursed over R220 million of these loans and Absa has approved roughly R100 million. The banks say they are not profiting from the scheme.

Jaco le Roux, chief risk officer, Relationship Banking, Absa Retail and Business Banking, said although government guarantees 94{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of the exposure on these loans, participating banks are required to “not lend in a reckless manner”. But Absa may not ask for surety even if a business is not a sole proprietor under certain circumstances.

“Our past experience has taught us over and over again that the commitment of the jockeys and entrepreneurs is vital in ensuring the repayment and success of a lending arrangement,” said Le Roux.

Counter-productive?

Azar Jammine, Chief Economist at Econometrix, said this will counter the objective of the loan guarantee scheme. He the ideal route would have been to avoid subjecting these loans to the normal surety requirements and for government to take on the risk.

“If government is not doing that then they are not going to get this off the ground at all. This is very disappointing because it suggests to me that the whole objective of this exercise is not actually being fulfilled,” he said.

 * Spoke on condition of anonymity.