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The government rejected a recommendation to make state-backed loans of up to $ 500,000 each available to distressed homeowners.
The recommendation came in a July document commissioned by the Treasury in the Corporate Financing Guarantee Scheme, which did not meet expectations.
The plan was unveiled in March and aimed to encourage banks to make loans to their business clients by backing 80 percent of loans, but by May, only 1 percent of available loans had been accepted and banks had only 16 percent of applications approved. under the policy.
Treasury commissioned a report from the economic and financial consultancy TDB advisory. The review, published under the Official Information Act, recommended extending the scheme to real estate investors and homeowners, particularly homeowners whose tenants required rent relief thanks to Covid-19.
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ROBERT KITCHEN / Things
Instead, Finance Minister Grant Robertson chose to keep investors and real estate developers out of the scheme.
“They are as likely to need a working capital buffer as any of the other eligible participants, especially those investors who have needed to give their tenants rent relief as a result. [of] COVID-19.
“On the basis that there does not appear to be any compelling reason to exclude these vectors, we believe they should be included,” the report says.
But Finance Minister Grant Robertson had other ideas and chose to keep investors and real estate developers out of the scheme when an expanded and redesigned version was released in August.
“At that point, we were willing to not push more dollars into real estate investing and do something that could inflame the housing market,” Robertson said.
It means that the property joins a small but exclusive club of sectors excluded from the scheme. The others are companies involved in the manufacture of cluster munitions, automatic or semi-automatic weapons, and antipersonnel mines, individuals involved in the manufacture or testing of nuclear weapons, tobacco companies, whaling, and recreational cannabis.
The plan was intended to bring money to companies facing the Covid-19 crisis. It would be managed by banks that had an existing relationship with their business clients.
To encourage the banks to lend the money, the government would back 80 percent of the loans, and the banks would assume the remaining 20 percent. Ordinary loan terms were relaxed to encourage banks to adopt the plan.
This was found to have been a failure, and the TDB review noted that the “intention” to expand access to the scheme “was transformed so that some of the banks’ lending criteria for scheme loans are more stringent than for out-of-scheme loans. “
“The evidence suggests that banks have continued to lend to clients, but have done so largely outside the scheme.”
The report notes that “the information required to accompany a BFGS loan application is more extensive than for normal bank loans.”
The review criticized the way the scheme had been sold to bank clients, many of whom thought it was a grant and not a loan.
“Borrowers’ perceptions of what the scheme is often do not correspond to reality.
“The reality is that it is a loan, the perception is that it is a grant.”
BFGS was not successful even in international comparisons. It lent around 0.02% of GDP, while a Singapore scheme lent 0.38% of GDP and a mix of managed UK plans to loan schemes equaled 0.5% of GDP.
This was attributed to very low approval rates for the loans. New Zealand approved 1 loan for every 13,000 people, the next lowest approval rate was in Singapore where 1 loan was approved for every 2,500 people.
The Swiss scheme approved 1 loan for every 70 people.
Maarten Holl / Things
The report recommended extending the scheme to investors and homeowners whose tenants needed rent relief due to Covid-19.
The report also noted that banks actually had a much higher risk than the 20 percent they carried with each loan in the plan.
Because companies that borrow under the scheme are likely to already have other debt to the bank, if a borrower defaulted, it would result in a 20 percent loss on the BFGS loan, as well as any other loans the bank had issued.
TDB recommended subordinating the loans, so that if a borrower defaulted on one loan under the BFGS, it would not trigger a default on the company’s other loans with the bank. This change was not acted upon.
One change that TDB did not recommend was a massive extension of the scheme’s $ 500,000 loan limit. Robertson’s August changes raised that limit to $ 5 million.
He said this was done to align changes to the billing cap, which was raised to $ 200 million from just $ 80 million.
“We raised the allowable turnover to $ 200 million and wanted to make it available to a broader range of businesses,” Robertson said.
“Clearly, the original incarnation of the scheme hadn’t worked as we hoped.”
Although the scheme is not a runaway success, loans under the scheme have been on the rise. It lent about $ 600 million in the fortnight to November 24, compared to $ 400 million in the fortnight to October 27.
There are 1,392 borrowers in total as of November 24 representing $ 603 million of exposure.
