We wrote recently about the effect of the COVID-19 crisis on the banking sector. The Banking and Payments Federation of Ireland ("BPFI") members, including the five main retail banks, subsequently confirmed on 30 April that a further three-month extension to the current payment break will be made available to customers that continue to be directly impacted by the fallout from the pandemic, making a payment break of up to six months in total.
Also on 30 April, the BPFI published its Economic Recovery Plan (the "Plan") setting out measures to facilitate liquidity and capital flow to SMEs. The Irish government is looking at putting in place a better set of funding schemes or amending the existing ones, so it is likely that a number of the BPFI's proposals will be substantially enacted.
The Plan's various proposals for the support of SMEs are considered below.
State Guarantee of Loans
The Plan proposes the creation of a new COVID Business Support Fund, whose activities would have the following characteristics: a) 90% state guarantee for micro enterprises for loans up to ?50,000; b) 80% state guarantee for loans up to ?5 million for small and medium-sized enterprises; c) no portfolio cap applied; d) repayment term of up to 10 years; e) interest-free for SMEs for 12 months (funding of interest during this period to be agreed); f) general interest rates to be aligned with state guarantee provided; g) limits on restructuring of existing debt to be agreed; h) straightforward application process with an appropriately user-friendly application form; i) requirements on affordability assessment under the current SME Regulations may be waived.
Mid-Cap and Larger Businesses
The BPFI envisages a separate scheme for businesses with turnover of more than ?50 million, which could be a variant of that proposed for SMEs, with a cap of up to ?25 million. The Plan suggests that such funding would have a shorter term of up to 5 years, with margin ratchets from the third year to create incentives for refinancing.
Direct Fiscal Support
The Plan proposes a review of tax rates in sectors particularly affected by the COVID crisis, such as tourism and hospitality, with a view to reducing tax burden for a year. In addition, a reduction in commercial rates could provide needed liquidity support for these businesses.
A number of small businesses will not be in a position to take on increased debt and will need a direct cash injection just to achieve initial stability. To this end, it is proposed that the government create a fund under the control of a State-sponsored organisation to offer non-refundable grants during the initial six months of operations.
Working Capital Loan Scheme
The Strategic Banking Corporation of Ireland (SBCI) COVID-19 Working Capital Loan Scheme was originally launched as a ?200 million scheme and subsequently expanded to ?450 million. The scheme is available to eligible businesses impacted by COVID-19 resulting in business turnover/profitability being reduced by a minimum of 15%. The Plan proposes that the loan term of this scheme or any other future scheme should be increased to at least five years covering all sectors, including agriculture. Also, the requirement for eligibility checks, business plan and innovation criteria could be removed, it is suggested, as being too onerous for SMEs.
Special Task Force for SMEs
The task force would bring together key representatives from government, business and banking to identify how the SME sector can help drive recovery.
Development of Sector Specific Plans for SMEs
The Plan suggests that banks should begin to work with each of the sectors across their SME customer base to develop sector specific treatment strategies that will then inform individualised activation plans, especially in areas such as hospitality, tourism, accommodation and retail.
Export Credit Insurance
The Plan proposes that a government-backed export credit insurance scheme be put in place to ensure that exporters are not adversely affected.
Given that many SMEs will inevitably face insolvency due to the COVID crisis, a more user-friendly and less costly examinership regime could be made to work to enable some of these businesses to survive. An Administrative Insolvency proposal has been put forward by ISME (the Irish SME Association) and the BPFI is broadly supportive of such a proposal.
Liquidity Support for Non-Bank Lenders
An urgent issue for some non-bank lenders in meeting SME needs is maintaining revolving credit lines from 3rd party providers to enable them to provide liquidity to SMEs. Non-bank lenders would normally pay down these facilities by securitising newly originated loans, a market which will be difficult or expensive to access in the short term. The state guarantee scheme could potentially be used to support them in sourcing funding in the market.
Originally published 7th May 2020
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