The Business Finance Guarantee Scheme that's failed to fly was announced on the fly, without banks on board and with Treasury aware small business were actually most in need

The Government in March told businesses they could get $6.25 billion of partial taxpayer-underwritten loans from their banks, before it had banks on board the scheme.  

The New Zealand Bankers’ Association confirms Treasury officials met with its members, including the CEOs of the country’s biggest banks, on March 16 to talk at a high level about the possibility of introducing a term lending facility.

Four days later, on March 20, Treasury gave Finance Minister Grant Robertson a proposal around what a government-underwritten facility could look like, saying it would report back once it had talked to banks. 

Treasury stressed the Minister got his ducks in a row before going public with the scheme, saying (in underlined text), “We are hoping you can announce in around a week’s time, but this will depend on the urgency you indicate and reaching agreement by the banks.”

Yet on the same day, Robertson unveiled the Business Finance Guarantee Scheme (BFGS).

Global financial markets were in meltdown mode at the time, as panic about the spread of COVID-19 ramped up.

Robertson said businesses with annual turnovers of between $250,000 and $80 million would be eligible to get bank loans of up to $500,000 that would be 80% underwritten by the Crown. The idea was to take some of the credit risk from banks to encourage them to lend to businesses in need of working capital.

‘The faster we establish this facility, the higher the risks’

Treasury, in its March 20 report released today, told Robertson: “Actual deployment may require IT system changes in the banks. We will discuss a timeframe with the banks, but our current working assumption is that deployment could take up to six weeks.

“There will be operational implications (including resourcing needs) for the Treasury depending on the uptake of any scheme, and the number of firms that default on their loans. Both of these factors are hard to estimate at the moment.

“While we are eager for a light-touch approach, we want to ensure a secure and well-understood approach, and meet the audit requirements of the Office of the Auditor General. There is a need to balance timeframes with operational risk; the faster we establish this facility, the higher the risks to a secure and well-crafted operation.”

However, Robertson after 10 days, on April 1 said banks were ready to start receiving applications.

Treasury was at this point unable to provide interest.co.nz with the full, official, eligibility criteria for the scheme.

Banks' feedback might've been helpful

Fast-forward three months, and the BFGS has failed to take off. As at June 8, only 503 businesses had taken out $86 million of loans.

While the taxpayer is taking on more of the risk, banks still have to continue lending according to their criteria. The risk banks might actually struggle to get the cash out the door, was not one identified by Treasury. 

However, Treasury indicated it may have been too soon for businesses to start looking towards taking out new loans. Bank CEOs have since provided this feedback on the BFGS.

“While the economic outlook is generating widespread concern, most firms (with the exception of certain directly impacted firms) are still considering the implications of an actual or projected decline in cash flow and what this may imply. Firms will be reducing costs and banks still have the ability to support their clients for the time being," Treasury said. 

Small businesses the ones really struggling to access working capital

Treasury was also aware the small end of town was where the more urgent need was.

“The pressures will generally emerge first in smaller firms, which have fewer pre-approved precautionary loan facilities. Larger corporates have more options and deeper banking relationships,” it said.

“The banks still have capacity to provide support to their clients, notably large corporates that represent a good credit risk. In December, large corporates had $25 billion in undrawn balances, which was around 36% of loans outstanding. This percentage is lower for SMEs, only 6% of approved balances remained undrawn.”

Indeed, the uptake of the Small Business Cashflow Loan Scheme, announced on May 1, has been huge. 

The Inland Revenue-administered scheme has done about $1.4 billion of unsecured loans of up to $100,000, to businesses with 50 or fewer staff.

Other concerns around unveiling the scheme too quickly

The other concerns Treasury flagged around Robertson launching the BFGS without consulting banks, haven't proven material.

“While an early announcement may provide confidence that the Government will provide support, this course of action also carries the highest risk that you will crowd out early precautionary action by firms," it said.

"You may also reduce the amount of support the banks would otherwise provide. We see the risk as crowding out as being most acute for larger companies as they have more options to reduce cost or source finance…

“An early announcement before the scheme is agreed will compromise commercial negotiations potentially shifting risk and costs to the Crown."