Can Commercial Banks do more to help Government provide relief to SMME’s?

As part of the lockdown implemented by our government in March, they announced the Covid-19 Loan Guarantee Scheme amounting to R200bn.  The Scheme was to be managed by the commercial banks on behalf of the government.  The initial take-up of the scheme was poor, commercial banks only advanced R12bn of the allotted R200bn.  Government acknowledged that some of the conditions applied were too restrictive and loosened some of the criteria during July 2020.

 

According to the National Treasury website:

“The Covid-19 Loan Guarantee Scheme provides loans, substantially guaranteed by government, to eligible businesses to assist them during the COVID-19 pandemic. Funds borrowed from this scheme, through the banking industry, can be used for operational expenses, such as salaries, rent and lease agreements and contracts with suppliers”.

The amendments in July, included a change wherein “The test for good standing has been made easier. This has now moved back to 31 December 2019 from 29 February 2020, which will accommodate firms which were already experiencing cash-flow problems in February”

 

According to Treasury, Banks must apply their own policies on whether they wish to extend a loan to an applicant and each of the commercial banks have set out their requirements.  Examples of the application of this policy include

• ABSA’s requirement is that their customer must “have been negatively impacted by the COVID-19 lockdown and the resultant slowdown in the economy”.
• Nedbank states: “In financial distress, i.e. the ability to generate revenue has been adversely affected by Covid-19.” They add, “exhausted capacity to borrow under BAU terms.”
• Standard Bank highlights: “Have no existing capacity to borrow and negatively impacted by the COVID-19 lockdown and the resultant slowdown in the economy

 

This article highlights how commercial banks have undermined the government’s attempts to provide relief to the economy.

It is clear government wished to accommodate firms experiencing cash flow problems in December 2019 (following amendments).  What is crucial here is to understand cash flow was a determinant factor in defining stress.  Not necessarily income or revenue as already highlighted.

In addition, from the statements made above by government, it is clear that their intention was to cover the entire profit and loss statement, that is, operational expenditure and contracts with suppliers.  Contracts with suppliers effectively includes cost of sales.

 

Experiencing cash flow problems

In the medium and small business environment, the critical factor to survival has been and always will be their ability to maintain a positive cash flow.

South Africa has a traditionally poor record of paying their suppliers in accordance with their terms or stretching terms to 60 and 90 days.  And while government is a chief culprit, business does not have a good track record in this regard either!

During the Covid-19 pandemic, this will become substantially worse and unfortunately like the disease itself, it too has an incubation period beginning only 30 or 60 days after the revenue has been recognised.

In addition, firms that appear to be experiencing a positive growth benefit from the Covid-19 pandemic will also experience the negative impact from a phenomenon called “overtrading”.  An example is a PPE supplier, who experiences a surge in orders and after recognising the revenue is left waiting for the cash from his customers and is forced to liquidate as he is unable to pay his suppliers or his staff.  Other examples in the industries allowed to operate during the lockdown such as Food Manufacturing, are now experiencing cash flow stress.

Government was clear in recognising cash flow as being a determinant in their guidelines, while commercial banks through their policies and directives have unwittingly narrowed the requirements set out by government by limiting their enquiries to the impact of revenue.  Negative working capital movements, or negative free cash flow, have not been accepted as indicators of stress.

 

Contracts with suppliers

One of the areas highlighted by the government statement is that contracts with suppliers were included in the types of expenditure being considered for the relief measures.

In my view, this allows us to delve into the firm’s ability to ensure they have sufficient trade finance.

In the example of a PPE supplier, substantial cash resources are required to ensure the inventory can be ordered and paid for prior to the revenue or cash being received from their customer.  In my experience it has been the same for industries that continued to operate during the lockdown.  In addition, their experience was one of longer supply chain lead times, increased costs and even potentially expired inventory.

 

Conclusion

While the thrust of the Loan Guarantee Scheme was to support distressed businesses who, from the outset were unable to generate revenue, I believe that the parameters of the Scheme was sufficiently wide enough to allow commercial banks to consider firms whose financial stress was not directly linked to their revenue generating abilities.

In this regard, I would submit that ALL firms were negatively impacted in some way and a narrow view of the regulations has resulted in the Scheme being considered a failure.

Ultimately, first principles continue to apply, it is clear that any applicant must have a sound business case demonstrating why they need funds; demonstrating the impact of Covid-19 on the business and finally demonstrating how the loan will be utilised and hopefully repaid.

 

Robert Walsh is a Principal at The CFO Centre, based in the Western Cape. 

 

The CFO Centre provide the skill sets of experienced Finance Directors of large corporations to the small and medium sized enterprises (SME) sector, allowing smaller organisations to benefit from the expertise of a highly experienced Financial Director without incurring the expense of hiring someone full-time.  Over the last 20 years The CFO Centre has become the largest and most respected provider of part-time Finance Director services globally.

The CFO Centre can help small and medium sized enterprises to put such plans together so that the bank clearly understands the need for financing.