Loans are about to ‘peak’ in South Africa: banking association

The Banking Association of South Africa (Basa) says that applications for Covid-19 loans are expected to peak soon, due to the prevailing business and economic conditions.

The association said that business owners are reluctant to incur more debt, while uncertain business conditions and a weak economic outlook hamper their ability to generate sustainable income, from which they need to repay their loans.

“The slow pace of economic reform, an unreliable electricity supply and lack of inclusive growth, with the resulting weak consumer and business confidence, has also reduced opportunities for enterprise and the need for credit.

“The devastating 51% contraction (saar) in the South African economy in the second quarter of this year underlines the desperate need for structural economic reform, sustainable fiscal management and bold political leadership to ensure their successful implementation,” it said.

Based on present trends, banks expect to probably extend between R24.41 billion and R43.74 billon in Covid-19 loans to enterprises by January 2021.

The Reserve Bank and National Treasury have agreed with individual commercial banks to enable loans totalling a maximum of R67 billion under this scheme. The Reserve Bank and National Treasury have announced that the scheme could be extended to R200 billion, if required.

Separately from the loan guarantee scheme, since March 2020 banks have offered payment breaks, worth a combined R33.49 billion, to individuals and small, medium and commercial businesses to help keep them afloat through the lockdown.

Over 84% of individuals and 95% of businesses who requested help, received assistance, Basa said.

Liquidations set to soar

Business restructures and liquidations are set to soar as businesses grapple with Covid-19 related cost and other balance sheet related pressures, says Dumo Mbethe, chief executive for Momentum Corporate.

Data from Statistics SA shows that the total number of liquidations decreased by 7.1% in the three months up to July 2020 compared with the three months up to July 2019.

However, a year-on-year increase of 5,5% was recorded in July 2020, with voluntary liquidations increasing by 16 cases. Mbethe said that given these figures come from the courts, whose activity was seriously impacted by the pandemic and lockdown, it’s likely we’ll see them increase significantly in the near future.

“A number of companies have already announced widespread retrenchment exercises, and more are expected to follow,” he said.

“This has serious implications for the many South Africans whose only life insurance cover is the group life cover they have through their employer. Losing their jobs also means they lose their life cover in the middle of a pandemic.”

Mbethe said that retrenched employees should speak to a qualified financial adviser for personalised advice to help them balance their immediate short term expenses with their long term retirement goals.

Often households perceive luxury expenses as non-negotiable needs. Cutting back on “wants rather than needs” will free up money to cover their immediate financial needs, and this could help them to preserve all, or at least part of, their retirement savings, he said.

Payments to date

Basa says that there has been an increase in the rate of uptake in the Covid-19 loan guarantee scheme, despite demand for credit from the private sector continuing to slow, due to uncertain business conditions, unreliable electricity supply and a weak economy.

The association said that as of 29 August, banks have been able to provide a cumulative R48.04 billion in relief to South African businesses – R33.49 billion in payment breaks and R14,54 billion under the loan guarantee scheme.

Participating banks had received 42,202 applications for loans from their clients from the guarantee scheme. The average size of a loan paid out under the scheme is R1.27 million.

This means that if all the existing applications for loans were granted, at the average value of R1.27 million each, then the total demand from the scheme would be approximately R53.6 billion.

Of all the applications, 25% have been approved by banks and taken-up by businesses, while 37% are in the process of being assessed.

35% of applications were rejected because they did not meet the eligibility criteria for the loan, as set out by the Treasury and the SARB or because they did not meet banks’ risk criteria.

The main reasons, so far, for the rejections was that the businesses were not in ‘good standing’ or the requested loan value was too high and the repayments unaffordable for the business, Basa said.