Prof Josef Bonnici, Chairman at Malta Development Bank
Following the outbreak of the global pandemic, promotional banks across the globe took on a different dimension and started implementing anti-crisis initiatives intended primarily to help businesses stay afloat and protect jobs.
In April 2020, the MDB launched the Covid-19 Guarantee Scheme (CGS), an initiative made possible after leveraging a government guarantee of €350m. Through this scheme, the MDB is guaranteeing the loans extended by nine accredited commercial banks to meet the working capital requirements of businesses whose liquidity has been acutely impacted by the pandemic. Commercial banks are thus being provided with very substantial credit risk reduction and capital relief enabling the creation of a loan portfolio of up to €777.8m.
In view of the substantially reduced credit risk exposure, commercial banks are able to provide higher volume of finance, at lower interest rates and lower collateral requirements. Another important benefit for the beneficiaries relates to the wide array of eligible working capital costs covered under the CGS, which also includes regular loan repayments of bank loans approved before 23 March.
In addition, by providing a moratorium period on interest and capital, the CGS is providing the much-needed breathing space for businesses. Building on this, in May, the MDB obtained the European Commission’s approval to prolong the applicability period of the Scheme by a further three months, up to 30 September. Moreover, the Commission also approved an extension of the maximum moratorium period that commercial banks can provide under the CGS, which now can be extended by a further six months up to 18 months, on a case-by-case basis. Moratoria granted under the CGS are distinct from those granted on loans that are covered by the Central Bank of Malta’s (CBM) Directive 18; the latter are in respect of loans that were advanced prior to April 2020 and are governed by the guidelines issued by the European Banking Authority. The deadline for applications for moratoria, governed by the CBM Directive 18, expired on 31 March, whereas the deadline for applications for moratoria under the CGS will expire on 30 September.
By end April the partnering commercial banks have sanctioned a total of €444m in working capital loans. These CGS loans have supported 568 businesses, collectively employing 40,000 persons. The supported businesses range from large to micro firms from all economic sectors (see Chart 1). Firms in the tourism-related sectors (accommodation & food services and wholesale & retail), which were the most adversely impacted by the pandemic, have collectively been granted close to €200m or over 45% of the total.
Chart 1
Under the CGS, SMEs can apply for a loan up to €10m, while loans to large entities can reach €25m. During the first 12 months of this scheme (April 2020 – March), the average loan per facility stood at around €785,000. Almost 90% of the beneficiaries are classified as SMEs, whereas 60 are large entities (see Chart 2). As larger firms require a higher level of working capital, the requested loans of these enterprises were as expected higher (averaging €3.1m) than those requested by smaller firms (averaging €470,000).
Chart 2
Cashflow shortages may result in significant financial difficulties and a possible loss of productive capacity for the economy. The MDB is proud that by strengthening the working capital positions of local enterprises such adverse scenarios were largely neutralised.
As at end March, the bank’s total financing volumes, including all guarantees and loans, stood at close to €490m, predominantly spurred by the CGS, and to a lesser extent by the SME Invest facility. The impact of these schemes is notable on a national level. Data published by the CBM show that outstanding loans to non-financial corporations (NFCs) residing in Malta exceeded €4bn, with loans covered by MDB guarantee schemes accounting for more than 10% of this sum. Moreover, when looking at the bigger picture, over the same period, MDB’s support to local businesses has reached close to 4% of total lending in Malta (see Chart 3).
As can be seen in Chart 4, lending to NFCs (including loans supported by MDB) expanded by an annual rate of close to 8% as at end of March. Without MDB’s intervention, such lending would instead have contracted by 4%. This marked role is also noticeable when looking at the headline total lending in the country, with MDB-guaranteed loans contributing 4.1 percentage points or 60% of the overall credit growth of 6.7%, recorded during the year to March.
Chart 3
Chart 4
More recent data shows that more beneficiaries continued to apply for the CGS. Till the end of the scheme’s applicability period on 30 September, over €330m of additional guaranteed facilities remain available through intermediating commercial banks. The MDB encourages economic operators and their representative bodies to continue engaging with commercial banks and take advantage of the favourable terms of this scheme