By Paul Stober and Sue Hatton of the Banking Association South Africa (BASA)
In response to Covid-19, debt relief measures are offered by banks to consumers. Housing consumers have been the largest category of credit agreements where relief has been extended.
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Most relief measures for individual bank customers who are experiencing financial distress due to the Covid-19 pandemic and the national lockdown, were granted for mortgages and home loans.
At the request of the Banking Association South Africa (BASA), the Minister of Trade, Industry and Competition, Ebrahim Patel, published Government Gazette Notice 11058, which allowed banks to discuss a collective response to the Covid-19 pandemic. As a result, South African banks have, as at 4 July 2020, approved more than R31.19-billion in voluntary relief to individuals and businesses affected by the Covid-19 pandemic and national lockdown.
“Cash flow relief for eligible individuals and companies is critical to the preservation of jobs, businesses and to maintaining a functioning economy,” says the Managing Director of BASA, Bongiwe Kunene. “Banks hold in trust the salaries and savings of South Africa’s workers, professionals and businesses. It is therefore essential that we continue to extend credit responsibly and avoid blanket debt write-offs or any other actions that might place depositors’ funds at risk or otherwise undermine the integrity of the financial sector.”
As at 4 July 2020, individual customers had received R18.59-billion in relief, with banks approving 2.56 million (85.3%) of 3 million applications for assistance from customers who were in good standing. The R18.59-billion is the cumulative value of instalment payments that banks have deferred for their customers. Fees and interest on the credit agreement will continue to accumulate during the period of deferment.
The value of the credit agreements – from mortgages (home loans), to vehicle finance, to personal loans, among others – for which these payments have been deferred, is R384.3-billon. Banks consider these credit agreements to be ‘at risk’, as their customers have indicated that they are having difficulties servicing their credit agreements because of the economic impact of the pandemic and lockdown. Of this R384.3-billion, 58% are mortgages (home loans) and 24% vehicle finance. The remainder is various forms of unsecured loans.
Mortgages (home loans), at 58%, for individual customers were the largest category of credit agreements where relief has been extended to protect the book value at risk or asset.
Commercial, small and medium businesses received R12.6-billion in voluntary relief, with banks approving 132 959 (95.1%) of 139 737 applications for assistance. The value of the assets at risk, from the financial distress of small and medium and commercial businesses, is R137.04-billion.
The period of relief initially extended to some individuals and businesses will start expiring from end of June 2020. Customers who require an extension in terms of the relief already granted should contact their credit providers. A number of banks have already announced details of further relief on offer to their customers. The offering of each bank depends on their individual capacity and risk management policies.
Separately, over R11.12-billion has been extended to 8 002 qualifying distressed small businesses under the Covid-19 Loan Guarantee Scheme, which was launched in mid-May. The initial R100-billion Covid-19 Loan Guarantee Scheme is a special facility that is being managed by banks on behalf of the South African Reserve Bank and National Treasury, to help small and medium businesses, support the economy and save jobs. The scheme currently allows qualifying enterprises to apply for loans from their primary bank to fund three months operating costs, such as salaries, rent and supplier payments.
Loan Guarantee Scheme breakdown
The Loan Guarantee Scheme is a commercial arrangement that gives borrowers access to business-critical funding at low interest rates and preferential repayment terms. However, it is not meant to support small businesses with grants. Each loan is subject to a credit approval process during which banks must evaluate whether the business will be able to service its commitments as economic activity resumes. This is to ensure that banks lend responsibly and to protect the fiscus.
Banks will not profit from the SARB guarantee loan scheme, but provision has been made for them to recover the administrative expenses of facilitating the loans and the cost of capital.
Risk-sharing mechanisms balance support for businesses with safety of banks. Any losses are first offset against margins earned on a bank’s portfolio of Covid-19 loans. Further losses are offset against a guarantee fee paid to the National Treasury by banks, which is 0.5% of the value of the loan. Any further losses are shared: 6% absorbed by banks and net balance by Treasury.
Some companies have indicated a reluctance to take on further debt in a weak economy and uncertain business environment. To increase the rate of take-up of the Loan Guarantee Scheme, banks are currently working with the National Treasury and the SARB to make loans more accessible to distressed businesses. Further details will be made available as soon as they are agreed.
South Africa is facing a challenging few months and years. The Covid-19 pandemic is expected to peak in the coming months putting the lives and livelihoods of South Africans at risk. Some economists estimate that the economy will take two to three year for the economy to recover. The primary responsibilities of commercial banks are the safety of depositor’s funds and the stability of the financial system. However, as responsible corporate citizens, banks will do as much as can be reasonably expected of them, to assist their customers in the challenging times ahead.
