About two weeks ago the New Zealand Government announced that it, the Reserve Bank, and most registered banks would work together to ensure that banks could continue to support New Zealanders through this crisis. This package is a real positive as the global recovery from the Global Financial Crisis of 2008-09 was slowed due to businesses not being able to obtain credit.
The terms and conditions of individual offerings are largely up to the individual banks, but the features of the Government-backed scheme are as follows:
- Individuals whose incomes are affected by COVID-19 can take a 6-month mortgage holiday from principal and/or interest. This is being done to try and avoid people losing their homes.
- The Reserve Bank has significantly reduced the capital ratios for the banks. In simple terms this allows the banks to lend more without needing further deposit holders. This is a welcome change as several banks were already starting to pull back from business lending over the past 6 months as they were nearing their capital ratio limits.
- The Crown will guarantee 80% of business loans to SMEs under a scheme that will apply to businesses with turnover of $250,000 to $80m. The limit of these loans will be $500,000 and for a maximum of 3 years. The banks are expected to set competitive rates. The Government is underwriting these loans, because it is natural that the banks would not want to expose themselves to undue risk in the current economic climate. Since the Government is underwriting 80% of the risk, the Government is also expecting some relaxation of lending criteria.
This scheme is underwritten by Government but is managed by a customer’s usual bank. It seems to be a condition of these packages that it is only available for a bank’s existing customers.
The banks have been offering mortgage deferrals to individuals under the Government scheme for over a week. In fact, most banks were offering customers interest-only packages before the Government-backed scheme was announced.
Anyone considering taking a mortgage deferral needs to be aware that deferring interest will cause the amount of the loan to increase as interest will continue to accrue. For this reason, we suggest that anyone needing to take a mortgage holiday should try and do so by converting a loan to interest only, rather than a full mortgage holiday, as the size of the loan will not increase over while a loan is interest only.
The final details for the business loan scheme have only just been settled, and applications for those loans only opened late last week.
The consistent message we are hearing from banks is that these Government-backed business loans are not going to be handed out like lollies. The customer will have to exhaust other funding facilities first and show that the strain on the business was caused by COVID-19. The messaging we are hearing from banks is that if a business was struggling or in arrears before COVID-19, then don’t even bother. On the other hand, the banks are already showing a willingness to support customers genuinely affected by COVID-19 but they generally require relatively significant supporting information.
The decision on whether to lend in a particular case will be made by the bank using their lending criteria. Therefore, an application will need to be supported by financial and other information.
As applications only opened last night, the bankers we have talked to are not 100% sure what information they will require. However, the initial information coming from the banks is that they will need more information than normal, not less. As these loans are only for a 3-year term, a robust recovery plan seems to be a necessity in most cases.
If you think that you may need additional banking support, and you are not already talking to us about your financial position and recovery plan, then we suggest that you reach out to us as soon as possible.
Business loans – Excluded sectors
The Government has excluded specific sectors from the business loan packages. A few of these are truly odd (like whale meat processing and production of nuclear weapons), but the following excluded sectors will be highly relevant to our clients:
- Property development; and
- Property investment; and
- Core agriculture (the likes of horticulture, viticulture, and contractors supporting agriculture are not excluded).
We understand that there is serious campaigning by the Banking Association to include commercial property investment, so watch this space.