It's official — banks in South Africa don’t like lending to small businesses, and this has been confirmed by recent figures from the Reserve Bank.
The figures show that while the banks’ credit exposure to bigger businesses has increased since the beginning of 2012, it has, since the 2008 recession, remained almost flat at around R180 billion ($12.3bn) for loans of up to R7.5 million. Only in October last year did it pass the level it had reached just before the recession.
The banks’ reluctance to increase lending to small firms is sending many of them the way of Business Partners, which finances small businesses. The financier, which has an average loan size of R2.5m, has increased its exposure to the sector by 61% to R2.7bn between March 2008 and December 2015.
It was on track to lend just shy of a record R1bn in the year to March 31, which would be at least a third up on the previous year. Last year it disbursed R630.7m (discounting investments in its own properties). Its previous record was in 2008/2009, when it disbursed R773m.
An analysis by the Financial Mail of the Reserve Bank’s credit exposure figures, captured on the BA200 form submitted to the bank supervision department, shows that banks’ exposure to firms with annual sales of up to R400m/year (referred to as SME corporate loans) began to take off around January 2012.
Exposure to the segment expanded by about 80% to R387.4bn between August 2008 and December 2015. In comparison, banks’ exposure to firms with loans of up to R7.5m (referred to as SME retail loans) dipped following the recession before edging up slightly in 2013.
When the book crossed R192.1bn in October, it was the highest it’s been for the segment since April 2008, when it stood at R190.2bn. It peaked in November at R196.7bn and fell to R187.5bn in December.
In its 2015 integrated report Business Partners notes that “traditional lenders, especially from within the banking sector, continue to apply stringent lending criteria to SMEs” and this is driving lending at the financier.
Business Partners managing director Nazeem Martin attributes the expected record year to the high number of approvals that the financier did in 2014/2015, which were held up by red tape at the time.
He says a large number of its transactions are referred from banks and adds that the lender does its best business in difficult economic times. This, he says, is because it is then able to get clients that otherwise would have got finance from banks but are now unable to because of banks’ tighter lending conditions.
“Banks don’t like to do SME lending,” says Martin. He says banks are pressured into lending to small businesses by government, or in order to win government business. He believes banks are more interested in getting transactional banking business such as cheque and credit card lending.
Banks themselves paint a somewhat contradictory picture. After all, they can still increase lending and keep their exposure near the same if their collections rate exceeds that of issuing new credit.
Nedbank’s Tracy Afonso, head of professional and small business banking, says the bank’s small business index confirms that small business growth has slowed for firms under two years old. This has reduced the demand for lending.
But Ethel Nyembe, head of small enterprise at Standard Bank, says lending to firms with an annual turnover of R10m was up 13% last year over 2014.
She believes the figures in the Reserve Bank’s BA reports are not a full reflection of the market’s appetite for credit within this space. “A fair reflection could be gained from analysing the Bank’s annual reports for lending growth within the segments,” she adds.
“SME lending within Standard Bank has seen a turnaround in the profitability of the book. Profits are up over 100%, largely due to a turnaround of losses in the prior year.”
In addition, the bank lent out R3.5bn to black SMEs in 2015. Funding of black SMEs has increased by 34.5% from 2013, she says.
FNB Business CE Mike Vacy-Lyle says while SME lending has slowed at the bank, credit to firms with annual sales of up to R10m grew by 25% last year over 2014.
Though only about one in five of the bank’s SME loans were to businesses that are less than two years old (about 11% of transactions at Standard Bank and 14% at Business Partners are to start-ups), he says this figure has grown as the bank has got better at assessing early-stage ideas and using more data points and better credit scoring in its financing decisions.
He believes the sector still holds a lot of opportunity, but that to realise this banks have to be doing transactional banking in order to build a credit history of those to whom it lends.
Iqraam Abdul Haq, the head of the SME segment at Barclays Africa, says lending to firms with an annual turnover of up to R20m grew 7.8% in the 2015 financial year from 2014.
Absa, however, funded just 25 start-ups with a total of R23m in 2015. It provided R569m to 212 black SMEs in 2015.
Sasfin Bank CE Roland Sassoon says the bank lent about R2.6bn to SMEs (which includes firms with annual sales and assets of up to R230m ) in the year to June 30 last year, with profits up about 34%.
He says most of the growth in lending came from the acquisition of corporate asset finance company Fintech and that SME lending has expanded “strongly” in the past three years.
But the Reserve Bank figures show that the growth in bank finance has been mostly to larger firms.
Business Partners gains
Banks’ reluctance to lend to SMEs comes at a price for business owners, because alternative finance is more expensive.
Though Business Partners’ loans are usually priced at prime plus 1%, they often also involve the financier taking an equity share or longer-term royalty payments. Its profit was up by 18% to R182.7m in 2014/2015. Defaults are less than 4%.
But Martin says the financier needs to make a return on equity for shareholders (usually about 1%-2% above inflation) and still have enough to grow the pool of resources for lending. “If we are less expensive and are not viable, is that the ideal situation?” he asks.
He believes banks are not the ideal vehicle to increase SME lending and that SA needs more funders like Business Partners — able to be patient investors and make a profit while lending sustainably. Financing businesses through grants or below-prime loans would not help breed sustainable enterprises, he believes.
“If we want banks to do risk finance you are asking them to do the impossible and are asking them to leave the Basel rules (including the obligation of having to cover the full value of any SME loan that goes bad),” he said.
Yet it is troubling that national treasury said in the 2016 Budget Review that just 30% of registered small businesses have access to finance.
While crowdfunding, which is still at a nascent level in SA, could help small businesses, an initiative by national treasury to get banks and credit providers to share credit information on small firms offers some hope.
Rajeen Devpruth, the project manager at the SA Credit & Risk Reporting Association, says the association has for two years been developing a system which will allow credit providers to share data that will help them determine the credit risk of a small business applying for finance.
The big four banks are on board and the association is now determining which data should be shared. A legal review has also been undertaken to ascertain whether the system would infringe on the Protection of Personal Information Act or the National Credit Act.
Devpruth couldn’t say when the initiative would be launched, but it may be a step in the right direction, if the Reserve Bank figures are anything to go by.
This story originally appeared in Financial Mail (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a