The government is proposing to take out larger bank loans to businesses through its subscribed “Business Finance Guarantee Scheme” (BFGS).
It multiplies by 10 the limit of loans offered under the program, from $ 500,000 to $ 5 million.
It also expands the BFGS to allow businesses to use loans for purposes other than cash flow. They can now use the loans for “fixed assets and projects related to responding or recovering from the impacts of Covid-19”. They can also refinance up to 20% of their existing debt.
Large companies, with annual turnover of up to $ 200 million, are also eligible. This cap was previously $ 80 million.
And the government is increasing the maximum loan term from three to five years.
If a company defaults on a loan under the BFGS, its bank will go through its normal process to collect the debt. If the debt cannot be collected, the bank can claim 80% of any shortfall from the Crown.
By transferring most of the risk from the bank to the Crown, the aim of BFGS is to encourage the bank to lend more freely.
It is ultimately the bank that decides whether or not to lend to a company.
Although the government does not require the bank to take collateral or the borrower to provide personal collateral, the bank can still choose to do so.
RBNZ Modifies Term Loan Facility
The Reserve Bank supported the BFGS by offering to lend money to banks at the official exchange rate on condition that they on-lend these funds as part of the program.
As the government increases the duration of loans under the program, the Reserve Bank is also increasing the maximum duration of its term loan facility to five years.
Participating banks – ANZ, ASB, BNZ, Heartland Bank, Kiwibank, SBS Bank, TSB, Bank of China and Westpac – have so far drawn only $ 27 million on the facility.
$ 150 million loaned under $ 6.25 billion program
Banks only loaned $ 150 million to 780 customers through BFGS.
When Finance Minister Grant Robertson launched the program in March, as stock markets collapsed, he expected companies to borrow up to $ 6.25 billion.
The regime encountered problems because it was announced on the fly before the banks are ready to receive the requests.
Eligibility criteria were also restricted and therefore had to be expanded in May to include farm businesses and small businesses. Robertson also removed the requirement for banks to take collateral in certain cases.
While Kiwibank’s corporate client director, Quentin Quin, said that “many” clients would now be eligible for the program, New Zealand Bankers Association CEO Roger Beaumont said that “adoption will ultimately be driven by business demand.”
Reserve Bank Deputy Governor Geoff Bascand noted last month that there had been a “significant decline in demand for business credit” (in all areas, beyond the corporate finance) during the first half of 2020.
“While the demand for loans for working capital of small and medium-sized enterprises, enterprises and sheep and cattle ranchers has increased, the demand for credit for capital expenditure has decreased considerably,” he said. declared.
He questioned the prospect of an immediate hike, saying: “Business investment intentions have also fallen sharply, with increased uncertainty over the strength of future demand.
“Some apparent weakening in demand for credit may also reflect the perception by businesses that credit is not available or that conditions have tightened.”
Bascand has repeatedly urged banks to lend, to avoid adding a credit crunch to the economic crisis caused by Covid-19.
The poorest small businesses
Coming back to the BFGS, Treasury in March advised Small businesses in Robertson, not covered by the program, needed more urgent support.
“The pressures will usually emerge first in small businesses, which have fewer pre-approved precautionary lending facilities. Big companies have more options and deeper banking relationships, ”the Treasury said.
“Banks still have the ability to support their customers, especially large companies that represent a good credit risk.
Indeed, the adoption of the program announced subsequently, managed by the Inland Revenue Small Business Cash Loan Program, which offers unsecured interest free loans of up to $ 100,000 to small businesses, has been huge.
The BFGS is available until December 31.
See Cash website to learn more about the BFGS.