Business Report: Treasury acknowledges SMEs face challenging environment

National Treasury acknowledges small businesses are being knocked by some headwinds in the operating environment, including rising interest rates, severe electricity constraints and natural disasters in some parts of the country.

Vukile Davidson, Treasury’s chief director for Financial Sector Policy, said, “Some additional and continual support is required for small businesses to emerge from times characterised by severe lockdowns.

These operating environment challenges, which are the responsibility of government really need to be addressed.”

He was speaking at the Small Business Institute webinar, titled “Reflections on supporting our SMEs in a time of Covid-19“, held last week.

Policy should be oriented towards ensuring an enabling operating environment for SMEs as they emerged out of the period characterised by lockdowns.

Davidson said a priority to tackle would be the appropriate regulation and streamlining of the Development Finance Institutions (DFIs).

“Government DFIs have been blighted by mismanagement; in some instances are politically motivated; or give crony loans; amid governance challenges and a culture of poor repayment. So there is consensus that some consolidation and redesign is required in particular for challenges related to repayment,” he said.

“What we have seen through the Loan Guarantee Scheme as well as the successor scheme, is that when you work with private sector repayment cultures dramatically improve. This to me indicates an important discussion we need to have about the role and nature of public financial support for SMEs.”

Generally around the world countries were decreasing the number of state-owned financial institutions precisely because managing these issues had proven really difficult even for countries with higher and stronger frameworks of governance, he said.

“We need to assess and come up with a solution urgently,” Davidson said

Business still needed support mechanisms to access funding.

In some instances, there were businesses that just managed to survive and required further investment.

“In other cases, there has been an exiting of some businesses in arrears and the survivor businesses will require additional funding to expand their operations and employment. We think that the Bounce-Back Loan Scheme introduced earlier in the year will provide support,” he said.

Unlike the first scheme, there are some key changes in the new one.

In this scheme the government takes on 20 percent of the first loss, as opposed to the previous scheme where losses was shared equally with financial institutions.

Davidson said the Treasury believed that through engagement with finance providers that this first loss mechanism would result in greater uptake.

“In addition, we have dropped the requirement of collateral. This is driven by the experience of businesses particularly following the riots and later floods. We have also expanded access to the scheme to DFIs that wished to participate as well as non-bank SME financing providers.”

He, however, acknowledged that there was tension, as the scheme had capped the loans at repo plus 6.5 percent, which at the moment went to 11 percent.

He said the feedback they had received from many non-bank providers was that they were unable to raise funding to come in below the capped rate.

“We want to provide funding that is cheap enough to incentivise SMEs taking the loan including through additional channels, but expand the number of channels we have to allow the non-SME providers, who source funding at rates much higher than the repo to overall drive up the cost of funding to SMEs. Trying to overall manage the overall cost that SMEs face to expanding the channels has been a difficult balancing act,” he said.

With regard to policy, he said the Treasury would also be undertaking some reforms, including facilitating the creation of SME-credit information system. This was aimed to address challenges of the credit quality of institutions. In addition to this, work was also ongoing on collateral a registry system to allow SMEs to register collateral to reduce their overall cost of funding.

The government said it was committed to addressing the structural constraints facing small businesses in order for financial services to become more accessible. These are contained in a financial inclusion policy document, which was a pillar dedicated to SME access to finance

There is also a South African-developed SME Access to Finance Action Plan, which proposes specific steps. The SMEs operating environment would be further supported by Treasury’s broader policy reforms including supporting financial literacy and consumer financial education to the development of a National Consumer Financial Education Strategy, which was higher on the agenda, Davidson said.

Also speaking at the webinar, Small Enterprise Finance Agenc Sefa chief executive Mxolisi Matshamba said small, medium, micro-sized enterprises (SMMEs) were unable to service the debts due to payment delays by government departments.

He said these delays caused SMMEs to be unable to service some of the debts that Sefa had provided to them.

“Some of us will remember that …any debt that is older than 120 days, we will have to impair that debt. It also now by extension impacts on the book of Sefa because of the behaviour of government departments and municipalities with regard to paying SMMEs on time.

“This is one area that the National Treasury and the Dtic (Department of Trade, Industry and Competition) are working very hard to bridge that gap, but I think more work can be done because that is the main killer of SMMEs that we finance through our intermediaries,” Matshamba said.

by IOL –

Given Majola