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Finance, the Reserve Bank of South Africa and the Association of Banks of South Africa have launched a new loan guarantee scheme.
The scheme is an initiative to provide government-guaranteed loans to eligible companies with an annual turnover of less than R300 million to help cover some of their operating expenses.
The funds loaned through this scheme can be used for operating expenses such as salaries, rental and leasing contracts, supplier contracts, among others.
The plan was first announced by President Cyril Ramaphosa in April and will be available through several participating banks, including:
- Absa
- First national bank;
- Investec
- Merchant bank;
- Nedbank
- Standard bank.
The Treasury said that government and commercial banks are sharing the risks of these loans.
Initially, the National Treasury has provided a guarantee of R100 billion to this scheme, with the option of increasing the guarantee to R200 billion if necessary and if the scheme is considered successful.
As part of the announcement, the Treasury released a question-and-answer document that describes some of the key points of the new scheme.
Some of the most important problems that the document addresses are described below:
Which companies qualify?
To qualify for the loan, a company must have an annual turnover of less than R300 million (measured at group level) and be in good standing with its bank.
This means that the company must be current on its other loan payments or account holder without any loans by the end of February 2020.
The business must have an existing relationship with the lending bank, be registered in SARS, and be in financial difficulties as a result of the Covid-19 outbreak and subsequent blockades.
Eligible companies should contact their primary or primary banker. Additional inquiries should be directed to individual banks, which administer the scheme.
What conditions are attached?
The loan can only be used for operating expenses such as salaries, rents, utilities, and regular course provider payments.
Companies cannot use these loans to pay dividends, make investments, pay bonds, or pay other loans that the company may have.
The loan amount will be disbursed to the client in up to three monthly installments. After that, no payment from the customer is expected for another three months.
The client has five years to repay the loan and associated interest. The interest rate is fixed at the repurchase rate plus 3.5%. Banks cannot vary this condition. This implies that the interest rate will change when the exchange rate changes.
Each applicant business is entitled to a single loan under this guarantee scheme. In addition, banks may request clients to provide guarantees or guarantees for this loan and may impose additional conditions as each bank deems appropriate.
Banks are not required to extend Covid-19 loans. They will use their risk assessment and credit application processes to approve or reject applications.
What happens if the business closes?
If a company that has taken out a loan goes into liquidation, the Covid-19 loan is treated as equity and therefore ranks behind other creditors.
Who benefits?
The loan guarantee scheme is intended to help small and medium businesses. While these agreements are designed to encourage banks to lend more than they would otherwise lend, banks are expected to make sound lending decisions and avoid reckless lending.
The intention is not for banks to make a profit on these loans.
Any net profit will be combined to offset losses in the scheme to minimize total losses for South African taxpayers.
The full document can be read below:
12M Treasury Loan Plan… by BusinessTech on Scribd
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