SPECIAL COVID-19 BANKING FACILITY (SCBF)
Background
To address the excess liquidity in the banking system, the Ministry of Finance and Economic Management (MFEM) has issued VT 3 billion worth of bonds in September 2020 to subsidise credit to individuals and businesses through the National Bank of Vanuatu (NBV) and the Vanuatu Agriculture Development Bank (VADB). This proposed expenditure was appropriated in Supplementary Appropriation (2020) Act No. 10 of 2020.
While the original plan was for the National Bank of Vanuatu(NBV) to be the only retail bank participating in a Concessional Loan Programme, concerns relating to the potential stress of NBV having such a large sum of subsidised credit on its balance sheet meant that MFEM expanded its offer to other retail banks.
Thus, the Ministry of Finance and Economic Management (MFEM) had discussions with retail banks about this scheme.
It has been renamed to the Special COVID-19 Banking Facility (SCBF).
The Special Covid-19 Banking Facility (SCBF) proposes a partnership between the following entities:
- Vanuatu’s major retail banks;
- Ministry of Finance and Economic Management (MFEM);
- Reserve Bank of Vanuatu (RBV).
The SCBF proposal reflects discussions between MFEM officials and staff of commercial banks, facilitated and assisted by RBV staff. At this stage, the SCBF proposal is a draft as details are still being worked out.
Policy Proposal
The goal of the SCBF is to use the Government’s funding through the retail banking system and RBV, to provide concessional interest rate bridging loans and overdraft extensions to select customers. The SCBF aims to assist the cash-flow and working capital requirements of select customers who have been struggling with daily operational costs, in order to sustain businesses and promote economic stability.
Details, conditions and sectoral scope of the SCBF
Details
The SCBF entails the provision of VT 900 million of support to the nation’s major retail banks, for concessional lending to business clients.
The focus will be clients on Covid-19 packages. Other bank customers will be serviced by products offered through the normal bank lending terms and conditions. The VT 900 million of support will be held in the Government’s account at RBV and made available as a guarantee.
The VT 900 million will be divided among all banks who choose to participate in the SCBF. If a bank does not take up its full quota then the Government will review the allocation after three months of the SCBF being active, and may decrease that bank’s allocation while increasing another’s/ others’.
The guarantee will apply only to the overdraft extension and bridging loan elements of the bank customers’ total loans and overdrafts. That is, the guarantee will not apply to the loan and overdraft elements that existed prior to the banks’ letters of offer for overdraft extensions and bridging loans being made.
The guarantee will cover the full, principal amount (100%) of the overdraft extension drawn down and bridging loan taken out. The guarantee will not apply to the interest charges associated with the overdraft extensions and bridging loans.
The guarantee will apply for the duration of the termed loan, up to a maximum period of five years.
The guarantee would become callable 120 days after a bank’s customer defaults on his/her loan.
This provides for a 30 day grace period after the 90 day non-performing loan period is realised (noting the RBV prudential guideline).
The guarantee requires the consent of Parliament by approval of a motion presented by the Honorable Minister of Finance to be presented in the next parliament sitting.
Conditions
Each bank customer will be limited to one bridging loan/ extension of overdraft to which the SCBF will apply. This means that MFEM will need to undertake screening to ensure, for example, that one customer does not take up the SCBF from multiple retail banks.
The value of the loan to be guaranteed under the SCBF will be capped, at an amount determined by the Minister of Finance.
The purpose of this, is two-fold. First, it will ensure that the SCBF support covers a spread of clients. Second, it will limit the risk to the state of guaranteeing the overdraft extension/ bridging loan (by not having one very large loan that becomes impaired and which the Government is obligated to provide funding for through the calling upon of the guarantee).
Sectoral scope
Aside from the conditions set out above, the banks will be free to choose which clients will benefit from the SCBF. This reflects the reality that banks know best their customers’ needs and the associated risks. It means too that the banks are free to draw from across their lending sectors (e.g. tourism, construction, personal) – with the one exception of government entities.
Next steps
- Further discussions to be held with retail banks, including specific terms and conditions.
- Participating retail banks to be confirmed.
- Commercial agreement between Government and retail banks to be drawn up.
Guarantee to be drafted, finalised and deposited as a motion in the next Parliament sitting.