Covid-19 Opinion

South African banks have done a huge amount over the last few months to support their customers and the economy of the country during the Covid-19 pandemic and national lockdown.

The view that banks have not done enough to help the country get through the social and economic devastation caused by the pandemic is wrong. Since the outbreak of the pandemic in South Africa, banks have very quickly changed their approach to business to support customers in good standing who were impacted by Covid-19.

Banks provided large numbers of their customers with three month payment breaks to help them at a time when many were left without – or a reduced – income. Eighty-four percent of individuals and 95% of commercial, small and medium enterprises who requested help from their banks, were assisted. This was not business as usual and amounted to an extraordinary effort conducted under lockdown with many bank staff working from home. Now that the initial period of cashflow assistance is over, banks are negotiating further financial relief with their customers who may require this, on an individual basis.

Separately, banks also restructured facilities for corporate and investment banking clients, which became necessary as adverse business conditions also reduced the ability of many large businesses to meet their obligations timeously. Cash flow relief for eligible individuals and businesses was critical to the preservation of quality of life, jobs, businesses and a functioning economy. These payment breaks provide much needed cashflow relief, but are not debt ‘write-offs’ and interest and fees on credit agreements will continue to accumulate, despite any necessary adjustment in terms. This is because banks still have an obligation to pay interest to those customers who have entrusted them with earning a return on their deposits. Banks must also recover their operating costs to remain sustainable and sound businesses. It is a fine balance – but our country certainly could not afford a banking crisis on top of our current challenges.

Banks have extended R15,10 billion in loans to small businesses under the Covid-19 Loan Guarantee Scheme. The scheme is a partnership between the South African Reserve Bank (SARB), the National Treasury and commercial banks, which offers loans to support qualifying enterprises until economic activity can resume. It is a risk sharing arrangement that encourages banks to lend more than they otherwise would, but not so much more as to put either the banks or taxpayers funds at undue risk. Based on their initial estimates of their customer’s needs, banks contractually agreed to facilitate loans of up to R67 billion under the scheme. As it stands, even if banks had approved all 43 759 existing applications for loans – at the average approved loan size of R1,25 million – then the total demand from the scheme would be approximately R54,5 billion. 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 Covid-19 Loan Guarantee Scheme does not provide grants. In terms of the criteria put in place by the SARB and National Treasury, the participating commercial banks have to be reasonably sure that applicants will be able to repay the loans. Given the current state of the country’s finances, South Africa does not have the money for taxpayers to absorb up to R200 billion in lost loans. And, as banks first have to use their shareholders’ funds – not taxpayers’ money – to absorb the first 6% of any losses, they have an additional responsibility to make sure the funds can be recovered. Since 1 August 2020, the conditions of the scheme have been relaxed, to make it easier for small businesses to qualify for a loan.

However, because of the criteria for the scheme and the need to balance protecting taxpayers with sustainable banking practices, banks are unfortunately not able to assist everyone who applied. Those businesses that feel their Covid-19 Loan Guarantee Scheme application was unfairly rejected, can lodge a complaint at the Ombudsman for Banking Services (OBS). The OBS can investigate and adjudicate complaints from businesses, involving amounts up to R10 million. While acknowledging that this might consume time and effort, the services of the OBS are free.

Despite immense social and political pressure to provide funds without appropriate checks and balances, banks have acted in the best interest of their customers, shareholders, taxpayers and the country’s financial system and will continue to do so. Banks hold in trust the salaries and savings of South African workers, professional and companies. It is their deposits that banks use to extend credit for investment in economically productive infrastructure, job creation and inclusive economic growth. If the financial system is harmed, South Africa is unlikely to ever be able to recover from the social and economic devastation of the pandemic. South Africa cannot afford a financial crisis on top of the current health, economic and social crisis.

Banks are already under pressure because of South Africa’s economic crisis and sovereign credit rating downgrades that long predates the Covid-19 pandemic. Banks have made significant provisions for future credit losses and face very difficult economic conditions. Bank earnings for the first half of 2020 were down between 70% and 80%, credit losses are higher than during the global financial crisis and bank share prices are down by between 40 and 50%. Under these conditions, demands on banks to support policies and projects that are not sustainable or commercially viable, will have the unintended consequence of threatening the stability of the financial system on which we depend.

Banks endorse the national economic recovery plan adopted under the aegis of the National Economic Development and Labour Council (Nedlac) and are committed to playing their part in supporting it in a responsible and sustainable way. But irresponsible credit provision cannot be a substitute for growth enhancing economic reform. To quote the governor of the SARB after the last meeting of the Monetary Policy Committee: “Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation. Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy.” Likewise, we should not be surprised that bank credit extension will be low in an environment of very poor consumer and business confidence, policy uncertainty and low growth, and an unreliable electricity supply. The SARB predicts the economy will contract by 8.2% in 2020. This underlines the desperate need for structural economic reform, sustainable fiscal management and bold political leadership to create opportunities for entrepreneurs, companies and banks.

Kunene is Managing Director of the Banking Association South Africa.