After the Bell: The amazing difficulty of getting SA businesses to accept cheap money

Let’s go back in time a bit. At the start of the Covid-19 crisis, governments around the world recognised that businesses, particularly small businesses, were at risk of getting into trouble. The crisis was obviously going to affect the economy as a whole, and some businesses, particularly those in the public space, such as restaurants, were going to get hit hard. And they were.

Various schemes were designed to help, and the most obvious was for governments to provide some kind of loan guarantee scheme. The way these schemes unfolded around the world is enormously instructive.

In SA, the government set aside R200-billion in 2020 for the Covid-19 Loan Guarantee Scheme. It was a centrepiece of the R500-billion government scheme to mitigate the effects of the economic downturn.

Despite being below commercial interest rates, the loans turned out to be unpopular with businesses. One problem was that to ensure banks did proper due diligence, the banks were required to take the hit if the businesses failed. That provision made the loans very unpopular with banks.

They were also unpopular with the prospective loan recipients, mainly because banks insisted on the personal liability of the owners. In other words, if the business foundered, the banks would come after the houses and personal property of the business owners.

The loan sizes were also a bit off. In the initial scheme, businesses had to have a maximum turnover of R300-million, but the maximum loan was set at R10-million per business. For smaller businesses, that could have made a major difference, but for larger businesses, it was chump change.

There were big administrative problems too because banks, if I understand it correctly, were prohibited from making a profit on these loans. The result was, Daily Maverick, among others, was told repeatedly by applicants that businesses were being refused the government’s Covid loan but were then quickly offered commercial loans by banks. Pretty cynical. Or, to put it another way, the incentives for banks to participate were negative.

Ultimately, the scheme more or less bombed. Only about R20-billion was ever dispersed, about 10% of the money set aside. About 15,000 loans were handed out.

So in 2022, the government had another crack at this problem. The decision was to substantially reduce the red tape involved, scale down the size of the eligible businesses, and explicitly shift some of the risk to the government itself. Hence, in what was called the Bounce Back Support Scheme, only R15-billion was set aside, business eligibility was reduced to companies with a maximum turnover of R100-million, and the government took on the risk of about 20% of the loans should the business concerned go belly-up.