$6.25b Government-backed loan scheme designed to see more firms through crisis

Tuesday, 24 March 2020

Small and medium-sized businesses should find it easier to get loans to help them through the coronavirus downturn after the Government agreed to assume most of the risk on $6.25 billion of bank loans.

The Business Loan Guarantee Scheme will see the Government swallow 80 per cent of any loss if a business defaults on a bank loan made under the scheme, with the bank taking on only the remaining 20 per cent of that risk and all of any profit.

Some finer details of how the scheme will operate have yet to be worked out.

Banks will take the profit from the loans but only carry 20 per cent of the risk.

But businesses will not have to specifically apply for the Government-backed loans.

* NZ Steel waiting for lockdown clarity

* Many bank branches will close**

Finance Minister Grant Robertson said the loan scheme would provide a short-term cushion for businesses.

Instead, businesses will approach their bank for a loan in their normal way and their bank will make a decision on that loan, but with the knowledge that the Government would pick up 80 per cent of the loss if it couldn't be repaid.

It is understood loans made under the arrangement will be intended to help businesses meet the operational costs of doing business during the coronavirus downturn, and not for spending on capital investments such as expansions and acquisitions.

As such, they appear most likely to be used as bridging loans to pay rent, staff and suppliers.

The bad loan risk will be split on a proportional basis, rather than being structured so that the Government or bank paid the first 80 per cent or 20 per cent of any default.

Finance Minister Grant Robertson said the scheme would provide short-term credit to cushion the financial distress on solvent small and medium-sized firms affected by the coronavirus crisis.

Loans will be limited to $500,000 per loan and to firms with an annual turnover of between $250,000 and $80m, with a maximum repayment term of three years.

Robertson said he expected the loans would be provided by the banks at competitive, transparent rates.

BusinessNZ chief executive Kirk Hope said the scheme was a really good step and would mean businesses would be able to go to their usual banker to access the help the Government was providing.

Those banks would already have a pretty good understanding of the risk that was sitting in each business, he said.

But he said one question was whether the $500,000 limit for loans made under Business Loan Guarantee Scheme would be enough for firms that were up at the $80m end of the turnover band.

Robertson said the Government, Reserve Bank and the Treasury were continuing to work on additional 'tailor-made support for larger, more complex businesses'.

Hope believed banks would not misuse the scheme.

'Bearing in mind the Government has made a massive commitment here, my view is the banks would respect that and be looking to ensure their clients could get through this next period of time and come out the other side.'

Reserve Bank governor Adrian Orr said banks remained 'well capitalised and liquid', but the scheme would help them extend credit to firms 'to bridge the difficult times created by Covid-19'.

'We will monitor banks' behaviour over coming months to assess the effectiveness of the risk-sharing scheme,' he said.